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PRINCIPLES 



OF 



POLITICAL ECONOMY 



BY 



SIMON NEWCOMB, Ph.D., LL.D. 

PROFESSOR OF MATHEMATICS, U. S. NAVY; PROFESSOR IN THE JOHNS HOPKINS UNIVERSITY 






' 



NEW YORK 
HARPER & BROTHERS, FRANKLIN SQUARE 

18S6 






i 



'; 



Copyright, 1885, by Harper & Brothers. 



All rights reserved. 






PKEFAOE. 



The following work is intended to embody an exposition of 
those principles of economic science which must be mastered 
by every one who would form an intelligent judgment of the 
causes which influence the public well-being. The main im- 
provement which the author has attempted is the presentation 
of the subject in a scientific form as an established body of 
principles. It has seemed to him that, from a s^entific stand- 
point, the most unsatisfactory feature of the current teaching 
of economics is the presentation of too many opposing views 
and arguments. He has endeavored to exclude all mere views, 
and substitute independent investigation for argument. Where 
investigation leads to a positive result, that result is stated in 
the form of a point gained ; where the result is still uncertain, 
the deficiency is pointed out, with hints of what new knowl- 
edge is wanting to supply it. It is hoped that the principles 
laid down in the first four books will be accepted by all who 
understand the subject as forming a well - ascertained, even 
if limited, body of doctrine. The very fact that the proposi- 
tions are well established leads to their being reached, not by 
dogmatic statements, but by courses of thought which leave 
the reader free at every step to compare the ideas presented 



Iv PREFACE. 

to him with all the facts he may have learned from observa- 
tion. 

The author takes a more hopeful view of the future develop- 
ment of economics than that commonly found in current dis- 
cussion. He holds that nothing is needed to give the subject 
a recognized place among the sciences except to treat and 
develop it as a science. Of course this can be done only by 
men trained in the work of scientific research and at the same 
time conscious of the psychological basis on which economic 
doctrine must rest. To such investigators a most interesting 
and hopeful field of research is opened in the study of the laws 
growing out of the soeietary circulation. If the same amount 
and kind of research which have been applied to the develop- 
ment of the laws of electricity were applied to this subject, 
there is every reason to suppose that it would either settle 
many questions now in dispute, or would at least show how 
they were to be settled. 

In order not to obliterate in the mind of the reader the dis- 
tinction between the scientific and the practical sides of the 
subject, all questions of public policy have been condensed into 
the concluding book. Here the author has allowed himself 
more freedom of discussion and treatment than elsewhere, but 
still encourages the reader to reach his own conclusions by his 
own methods of thought. This book would have been entirely 
omitted, as detracting from the purely scientific character of 
the work, were it not that applications of a science are essential 
to a good mastery of its first principles. The author trusts that 
little or nothing of a partisan character will be found even here, 
and that the student will leave the subject with a feeling that 
he must rely upon his own investigations for his practical con- 
clusions. 



PREFACE. V 

Possibly some apology may be needed for the very elemen- 
tary and perhaps fragmentary outline of logical method in 
science which forms the bulk of the first book. This outline 
was suggested by the belief that much of the confusion and 
difficulty which surround the subject arise from want of 
insight into the true significance and use of scientific proposi- 
tions. The author hopes that it will aid the student in seeing 
the relation between the logical and the practical sides of the 
subject, and in making each of these sides help the other. 

The general scope of the work has been determined by the 
principle of condensing into it that which is most valuable to 
the student in the sense of combining utility with difficulty of 
acquirement. He holds that the great want of the citizen who 
is to exercise an important influence upon the policy of the 
nation is understanding rather than knowledge. The latter he 
will be sure to acquire by his experience of the world, whether 
he is or is not educated ; but it will be barren of results with- 
out guiding principles by which to interpret and arrange the 
facts he observes. On the other hand, a command of prin- 
ciples requires a course of training and study which can seldom 
be undertaken with success after one has entered upon the 
serious business of life. It has therefore the highest elements 
of value to the student. It is hoped that the student who has 
mastered the first four books of the following work will feel 
able to proceed intelligently, either in the study of more ad- 
vanced branches, or in the explanation of those economic 
phenomena which will be of daily occurrence in the course of 
his active life. 

The questions found at the ends of some chapters are 
intended as exercises in applying the teachings of the chap- 
ters preceding them, and may serve to test the student's com- 



Vi PBEFAOE. 

m'and of the subject. Some of them may afford material for 
extended class discussion. In the conduct of such discussions 
a danger is to be guarded against. If they lead the student 
into the habit of arguing rather than investigating, they may do 
him more harm than good. It is essential that he should see 
in each case what the point at issue really is, and should be 
taught to recognize and avoid that large and alluring class of 
questions in which there is no point at issue. 

Plow far the work can be regarded as an original contribu- 
tion to economic science is to be determined by the critical 
reader. It may not, however, be inappropriate to indicate one 
or two points in which it has seemed to the author that the 
existing form of the subject admitted of improvement. He 
conceives that in current economic literature there is a triple 
confusion of things, with rights of property in things, and with 
the written evidences of those rights of property. This sub- 
ject he has discussed in connection with the conceptions of 
wealth, capital, and money. 

He has also felt the want of names for certain general con- 
cepts, among which the following may be mentioned : 

A name for everything which men receive in return for money 
paid, whether it be wealth transferred or services rendered. 

A general name for that which is transferred in payment, 
whether it be money or credit. 

A general term to express those operations of industry and 
commerce whereby human wants are satisfied, comprising pro- 
duction, transportation, and transfers of ownership. 

He has deemed it proper to leave to higher authorities the 
task of supplying this nomenclature, though, as the reader will 
notice, he has felt obliged to use several existing terms in a 
much wider sense than that commonly assigned them. 



TABLE OF CONTENTS. 



BOOK I. 

LOGICAL BASIS AND METHOD OF ECONOMIC 

SCIENCE. 

PAGE 

Chapter I. Introductory View of the Subject -3 

1. Objects of human activity. 2. The social organism. 3. Moving 
force of the social organism. 4. The law of labor. 5. Origin 
of the social feature. 6. Limitations upon the conception of 
an organism. 



Chapter II. Definition of the Field of Political Econ- 
omy 

7. The sciences growing out of human desires. 8. Illustrations. 
9. Definitions of economics. 



10 



Chapter III. Of Scientific Method 14: 

10. What scientific method is. 11. The problem of scientific meth- 
od. 12. Form of general propositions. 13. Induction and de- 
duction. 14. Succession of cause and effect. 15. Abstraction. 
16. Pure and applied science. 

Chapter IY. 'Special Feature* of Economic Method 22 

17. The foundation of economics in human nature. 18. Funda- 
mental hypotheses. 19. The deductive method. 20. Requi- 
sites for the deductive method. 21. Limitations on our knowl- 
edge of the fundamental data. 22. The law of averages. 
23. Unknown economical causes. 24. Summary of results. 



yiii CONTENTS. 



PAGE 



Chapter V. Fallacious Views of Economic Method. ... 32 
25. Example of misinterpretation. 26. The doctrinaire's error. 
27, 28. The popular error. 29. Illustration of the popular 
error. 30. Comparison of economics with meteorology. 
31. The scientific spirit. Illustrations and exercises. 



BOOK II. 

DESCRIPTION OF THE SOCIAL ORGANISM. 

DIVISION A.— DEFINITIONS AND OUTLINE. 

Chapter I. Of Wealth and its Associated Concepts 47 

1 Remarks on economic nomenclature. 2. Labor. 3. Wealth. 
4. Property or ownership. 5. Forms of ownership. 6. Credit. 
7. Divided property. 8. Difference between wealth and prop- 
erty. 9. Transfer of ownership. 10. Commodity. 11. Capi- 
tal. Note on the definition of the word property. 

Chapter II. Other Definitions 57 

12. Production. 13. Transfer of ownership, exchange, barter, pur- 
chase, and sale. 14. Consumption productive and unproduc- 
tive. 15. On economic processes. 16. Value. 17. Value as 
a mathematical quantity. Notes and exercises. 

DIVISION B.— THE MECHANISM OF PRODUCTION. 

Chapter III. The Requisites of Production 70 

18. Requisites of production illustrated. 19. Of knowledge as a 
requisite of production. 20, 21. Classification of knowledge. 

Chapter IV. Of Natural Agents as Requisites of Pro- 
duction , 77 

22. Raw material and land. 23. Of appropriation. 24. Necessity 
of right of property in natural agents, and objections to it. 



CONTENTS. i x 

PAGE 

Chapter V. Of Capital 82 

25, 26. Distinction between capital and sustenance. 27. Classifica- 
tion and examples of capital. 28. Fixed and circulating capital. 
29. The function of capital. 30. Capital the result of absti- 
nence. 31. Divided ownership of capital. Questions. 

Chapter YI. Of Labor 93 

32. The economic laboring unit. 33. Distinction of laborer and 
capitalist. 34. Wages of labor. 35. Of the different kinds of 
labor. 36. The modern organization of labor. 37. The division 
of labor. 38. Labor-saving machinery. 39. Steam- transpor- 
tation. 40. The organizers of labor. 41. Efficiency of the la- 
borer. 42. Friction of exchange. 

Chapter YII. The Increase of Population 107 

43, 44. Law of geometrical increase. 45, 46. Checks upon the 
increase of population. 47. The Malthusian theory of popu- 
lation. 

Chapter YIII. Of Fluctuations in Production and 

Consumption 114 

48. Introductory remarks. 49. Changes in the direction of labor. 
50. Competing and non-competing groups. 51. Transforma- 
bility of capital. 52. Inequalities in economic processes. 

Chapter IX. Production and Consumption from a Com- 
munistic Point of View 127 

53, 54. The communistic view. 55. Regulations necessary to the 
common good. 56. Conditions of general prosperity. 

Chapter X. Changes in the Social Organism with the 

Advance of Society 137 

57. Increase of knowledge and formation of habits. 58, 59. Im- 
provements in production. 60. Increase in the urban popula- 
tion. 61. Differentiation and integration. Questions. 



CONTENTS. 



DIVISION C— THE MECHANISM OF EXCHANGE. 

PAGE 

Chapter XI. Of Money 145 

62. Necessity of exchange. 63. Requirements of the medium of 
exchange. 64. Gold and silver as money. 65, 66. Coinage. 
67. Legal tender. 68. The monometallic and bimetallic sys- 
tems. 69. Limited bimetallism. 70. The subsidiary coinage. 
71. Volume of the currency. 

Chapter XII. Banks and Credit-money 157 

72. Nature of credits. 73. How banks arise. 74-76. Bank de- 
posits and cheques. 77. Individual deposits. 78. Capital stock. 
79. Discount functions. 80. Deposits as currency. 81. Bank 
circulation. 82. Ulterior development. 

Chapter XIII. Organization of Banks in Detail 168 

83. Weakness of banking. 84, 85. Fluctuations of business. 
86. Suspension of specie payments. 87-90. The national bank- 
ing system. 91. The Bank of England. 

Chapter XIY. The Clearing-house and Foreign Ex- 
change 1*9 

92. Functions of the clearing-house. 93. Analogy to exchanges in 
society. 94, 95. Foreign exchange. 

Chapter XY. Conclusions respecting the Volume of the 

Currency 187 

96. Kinds of currency. 97. Items to be included and excluded. 
98. Credit-money. 99. Relation of bank cheques to the cur- 
rency. Exercises. 



BOOK III. 

THE LAWS OF SUPPLY AND DEMAND. 

Chapter I. The Conception of Value 199 

1. Conception of value. 2. Relation of value to utility. 3. Jevons's 
theory of value. 4. Economic view of value. 5. Relation of 
value to human needs. 



CONTENTS. xi 

PAGE 

Chapter II. The Standard of Value 205 

6, 7. Mathematical conceptions. 8, 9. Scale of prices. 10. An 
absolute standard. 11, 12. The tabular standard of value. 

Chapter III. The Relation of Price and Demand 215 

13. Features of a market. 14. The law of price and demand. 
15. Sensitive and insensitive commodities. 16. Reaction of 
demand on price. 17. Modifications. 18. Equilibrium of sup- 
ply and demand. 19. Discounting the market. 20. Is the rise 
of price consequent on increase of demand temporary or per- 
manent? 21. Application to the purchasing power of money. 
Illustrations and exercises. 

Chapter IY. Monopolized Requisites of Production . . . 230 
22. Introductory remarks. 23. The monopoly element. 24. Three 
classes of monopolies distinguished. 25. Limitations upon 
monopolies. 26. Temporary monopolies. 27. Recapitulation. 
28, 29. Effect of monopolies upon supply and price. Exer- 
cises. 

Chapter Y. The Rent of Zand 241 

30. Opposing views. 31. Illustration of Ricardo's theory. 32. Fer- 
tility. 33. Relation of rent to prices. Exercises. 

Chapter VI. On Competition as determining Cost 248 

34. Of competition. 35. Of prices not determined by competition. 
36. Cases where competition is difficult. 37-39. Competition 
among business managers. 

Chapter VII. Of Profits and Cost of Production 257 

40. The old view. 41. Gross cost. 42. Net cost. 43. Profits. 

Chapter VIII. Preservation of Equilibrium between 

Supply and Demand 263 

44. The East India method. 45. Graduated cost of production. 
46. Illustrative example. 47. Modifications. Questions. 



x ii CONTENTS. 

PAGE 

Chapter IX. Equilibrium between Supply and Demand 

in the case of Absolute Monopolies 271 

48. Review. 49. Case of ownership by a single person or combi- 
nation. 50. Case of patented machines. 51. Case in which 
the supply is absolutely limited. 

Chapter X. International Supply and Demand 278 

52, 53. Equilibrium of prices. 54. Relative advantages of different 
countries in production. 55. Balance of trade by foreign ex- 
change. 56. Tax and cost of transportation. 57, 58. Balance 
of trade between two countries. 59. Total balance of trade 
with all countries. 60. Theories and nomenclature of the bal- 
ance of trade. 61. Advantages of international trade. Illus- 
trations and exercises. 

Chapter XI. Effect of Taxes iipon Supply, Demand, 
and International Trade 290 

62-66. Laws of division of taxes between producer and consumer. 
67, 68. Effect of taxes on international trade. 69. Special case 
of monopolized elements. 70, 71. Effect of import duties on 
the balance of trade. Exercises. 

Chapter XII. Causes which determine the Hate of In- 
terest. 302 

72. The usury question. 73. Equilibrium of supply and demand. 
74, 75. Causes of the rate of interest. 76. The minimum rate. 
77. Risk as affecting the rate of interest. 78. Nature of capi- 
tal and cause of interest. Exercises. 



BOOK IV. 

THE SOCIETART CIRCULATION". 

Chapter I. The Monetary Flow 315 

1. Exchanges in their totality. 2. The dual measure of an economic 
quantity as a fund and a flow. 3. Legal persons. 4. Flow of 
the currency. 5. Relation between the volume and the flow. 
6. Rapidity of circulation. Illustration of the wage-fund. 



CONTENTS. xiii 



PAGE 



Chapter II. The Equation of Societary Circulation .... 326 

7. The industrial circulation. 8. Equation of societary circulation. 
9, 10. Quantity of the industrial circulation. 11. Exceptions 
to the equation. 12. Illustrations of the societary circulation. 
Illustrations and exercises. 

Chapter III. Variations in the Equation of Societary 
Circulation 338 

13. Summary of results. 14. Changes in the volume of currency. 
15. Changes in rapidity of circulation. 16. Changes in the 
quantity of the industrial circulation and the scale of prices. 
17. Effects of changes in the volume of the currency. 18. Ef- 
fect of varying indebtedness. 19. Law of value of the cur- 
rency. Exercises. 

Chapter IY. The Measure of Demand by Absolute 

Value 348 

20. Definition and measure of demand. 21-23. The two measures 
of demand. 21. Popular view of demand. 25. Relation of 
demand to prosperity. 



Chapter Y. Individual Income and Expenditure 359 

26,27. Measure of income. 28. Expenditure of income. 29. First 
law of income. 30. Second law of income. 

Chapter YI. Demand as the Director of Industry 369 

31. Summary of previous conclusions. 32. Subdivisions of the 
monetary flow. 33. Purchase of commodities and demand for 
labor. 34. Fundamental law of employment. 35. Case of 
non-competing groups. 36. Other forms of expenditure. Ex- 
ercises. 

Chapter YII. Effect of a Diminution in the Flow of 

the Currency 380 

37. Immediate and ultimate effects of the diminution. 38. Con- 
tinual changes unavoidable. 39, 40. Exceptions to the ten- 
dency. 



x iv CONTENTS. 

PAGE 

Chapter VIII. Effect of Labor-saving Processes 388 

41. Effect of labor-saving upon the demand for labor. 42-44. Ef 
feet of improvements in production upon different classes. 
45. Another view of the subject. 

Chapter IX. The Functions of the Capitalist 396 

46-48. Investments do not change the demand for labor. 49. The 
same conclusion from the communistic stand-point. 50. Sus- 
tenance and capital. 51. The non-capitalist cannot consume 
a greater value than he produces. Exercises. 

Chapter X. The Relation of Capital to Labor 408 

52. Capital as the means of employing labor. 53. Funded capital 
of a factory. 54. Capital as a fund and a flow. 55. The two 
measures of the benefit of capital. 

Chapter XI. ' Laws of a Heterogeneous Currency 413 

56. How one currency may displace another. 57. Gresham's law. 
58. The law of displacement. Illustration. 

Chapter XII. Economic Fallacies 419 

59, 60. The labor fallacy. 61. The money fallacy. 62, 63. Illus- 
trations of the two fallacies. Illustration. Exercises. 

Appendix to Book TV 434 

Demand for commodities versus demand for labor. 



BOOK V. 

APPLICATIONS OF ECONOMIC SCIENCE. 

Chapter I. The Let-alone Principle 443 

1, 2. Nature and significance of laissez-faire. 3. The principle con- 
sidered as a fact. 4. Grounds of laissez-faire as a matter of 
right and a matter of policy. 5. Criticism and defence of the 
policy. 6. Limitations on the preceding criticisms. 7. Limits 
of application — The keep-out policy. 8. Relative applications 
of the two principles. 9. Example of a difficulty. Illustrations 
and exercises. 



CONTENTS. xv 



Chapter II. The Policy of a Protective Tariff 459 

10. General aspect and grounds of the policy. 11. Possible benefits 
from a protective tariff. 12. The argument for free trade. 

13. First argument for protection : the home-industry argument. 

14. The point at issue. 15. Second argument for protection: 
the wages argument. 16. Example from a glass factory. 
17. How far is foreign competition possible? 18. A protec- 
tive policy mutual and reciprocal. Illustrations and exercises. 



Chapter III. On Taxation 479 

19. General considerations. 20. General features of all taxation. 
21. Comparison of taxation with loans. 22,23. Effects of vari- 
ous modes of government expenditure. 24. Different kinds of 
taxes. 25. Double classification of taxes. 26. Results of levy- 
ing a tax. 27. An income-tax. 28. The taxation of wealth. 
29. Hints on improving our system. 



Chapter IY. Monometallism and Bimetallism 494 

30. The two systems. 31. The bimetallist compared with the mono- 
metallist view. 32. Criticism of the arguments. 33. Peculiar- 
ity of the bullion supply. 34. Analysis of the bimetallist 
. argument. 



Chapter Y. Regulation of the Currency 501 

35. The question stated. 36. Supposed economy of bank notes. 
37. General effects of a bank currency. 38. Irredeemable 
paper money. 39. Current views of the subject. 40. Condi- 
tions of value in an irredeemable currency. 41. Regulation by 
banks. 42. The general question at issue. 



Chapter YI. Of Socialistic Ideas 512 

43. General character of socialism. 44. Current errors. 45. Equity 
of our present system. 46. Limitations upon its equity. 
47, 48. Possibility of an improvement on our system. 49. Com- 
munistic view. 50. Fundamental difficulties. 



XVI 



CONTENTS. 



Chapter VII. Of Charitable Effort 526 

51. General considerations. 52. Alms-giving a form of demand. 
53,54. Mendicity a result of charity. 55. What can be done? 
56. Capital as a charitable agent. 57. Concluding considera- 
tions. 



ADDENDUM. 539 

Summary of the Leading Principles of Economics as set 
forth in the Present Work. 



BOOK I. 
LOGICAL BASIS AND METHOD 



OF 



ECONOMIC SCIENCE. 



POLITICAL ECONOMY. 



BOOK L— LOGICAL BASIS AND METHOD OF 
ECONOMIC SCIENCE. 



CHAPTER I. 

INTRODUCTORY VIEW OF THE SUBJECT. 

1. When we enter upon the study of a new subject it is 
sometimes best to begin by divesting our minds of all precon- 
ceived notions respecting it, and to make our first examination 
of it from the most wide-reaching point of view. Let us then 
commence our study of Political Economy by comparing cer- 
tain processes now going forward on the surface of this con- 
tinent with the corresponding ones of four centuries ago. 

If at so distant an epoch we had been able to survey the 
whole area now covered by the United States we should have 
seen no form of human activity except the pursuits of savage 
life. The principal occupation of the inhabitants would have 
been making war upon each other, and hunting wild animals 
for food. The soil and the forests would have been in their 
natural state, and neither ocean nor river would have borne 
any vessel larger than a canoe. 

Let us next suppose such a survey to be made at the present 
time by a being gifted with intelligence but not acquainted 
with the minds°of men. This intelligent being would now see 
a network of railways covering the greater part of the country. 
Steamers would be ploughing the rivers, cities would be build- 



4 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 1. 

ing, immense quantities of material of all kinds would be seen 
carried from place to place by locomotives, trains would be 
running in every direction, stores of goods would be piled in 
warehouses, and the prairies would be covered with fields of 
wheat which at certain seasons would be found undergoing the 
process of reaping, threshing, and transportation to the sea- 
board. 

It would be evident that this new activity was totally differ- 
ent in kind from anything which had before been going on. 
In past geological ages the rocks had been ploughed by glaciers, 
new mountains had arisen, rivers had changed their courses, 
new lakes had formed and old ones had sunk. But the intelli- 
gent being could form no idea why this new kind of activity 
had arisen until he became aware that it was all the work of 
other intelligent beings called men. Having learned this, let 
us suppose him to descend to the earth and seek out some one 
of the men engaged in the activity in order to learn its cause. 
He first finds the engineer of a locomotive making its way 
across the country. " Why do you run this locomotive ?" he 
inquires. The answer would be, " I run it in order to earn 
money." "But what do you want of money?" "I want to 
buy food, clothing, and shelter for myself and my family." 
Seeking out a farmer harvesting wheat on the prairie, he would 
get nearly the same answer. Go where he would, every one 
would tell him that he was working for himself, and that the 
object of all his labor was to secure an increase or a better sup- 
ply of certain articles necessary to his well-being, the most im- 
portant of which would serve for food, clothing, shelter, pleas- 
ure, and education. Every one he met would ostensibly have 
only his own interest in view. 

But further examination would show that, notwithstanding 
this apparent universal selfishness, all were engaged in working 
for the good of others. Suppose our intelligent being to 
alight on the plains of Texas and there find a body of men 
herding cattle. He sees that they kill the cattle and give 
their hides to other men to be carried to the sea-coast. Here 



1. 2.] INTRODUCTORY VIEW OF TEE SUBJECT. 5 

others put them on board a ship on which they are conveyed 
to England. In England another set of men tan the hides, 
and yet others make them into boots and shoes. Wishing to 
see what becomes of the boots and shoes, he traces them to the 
feet of a miner in Cornwall. The miner daily goes deep 
under ground to take out tin. Tracing this tin to its destina- 
tion, he finds it worked by countless hands, follows it across' 
the Atlantic to New York, into a freight-car, into a tinsmith's 
shop, finally seeing it end its long journey in the form of 
utensils for the use of the herdsman in Texas. 

"How did you know that that Cornwall miner wanted a pair 
of boots ?" he says to the herdsman. " How did you know that 
herdsman in Texas wanted a tin dipper?" he says to the miner. 
To his astonishment he finds each in entire ignorance of what 
becomes of his property after it leaves his hand. The herds- 
man does not know that his hides were even taken to the sea- 
shore ; the man who put them on board ship did not even know 
where the ship was going ; and not a man on the ship knew 
who purchased the hides in England. At Cornwall the miner 
did not know what became of his tin. In a word, nearly every 
one would be found ignorant of the final destination of the 
things he was making. 

2. By continuing his investigations our intelligent being 
will be led to the following conclusions : 

1. The operations which he has been studying are those of a 
single harmonious system. 

2. The object of this system is to supply each individual man 
with certain objects brought to him from all parts of the world 
and necessary to his existence, health, and pleasure. 

3. The harmonious working of the system leads to its being 
thought of as one great piece of mechanism. 

4. But this mechanism has no directing head to move it. 
Its operations are kept up by an infinity of internal forces, 
each of which operates only within a very limited sphere. 

We shall call this mechanism the social organism. 



6 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 4. 

3. Moving Force of the Social Organism. "We are now 
led to inquire into the general nature of the force which 
moves the organism. The matter may be summed up in the 
following fundamental proposition : 

The one force which keeps every part of the social organism 
in activity is the desire of each individual man to enjoy cer- 
tain results of the labor of others, which he can command only 
by himself laboring for others. 

The more highly developed the man is, the greater the 
number and variety of the wants which he requires to be sup- 
plied by the social organism. In the lower scale even of civil- 
ized society, it suffices if he can gain the food requisite to 
maintain his strength, and such clothing and shelter as will pro- 
tect him from the elements. But as he ascends in the scale he 
wants more palatable food, finer clothes, and a larger house. 
After enjoying these, his house must be embellished with every 
ornament that can please the eye, and furnished with every 
appliance that can give bodily ease. If he can command yet 
more from the social organism, the whole world must be 
searched to find food and drink for his table, and the clothing 
required to keep his body at the most agreeable temperature. 
Finall} 7 , after commanding everything which even the most 
cultivated man can desire, he will accumulate property merely 
for the love of possessing it, for the power which it gives him, 
and for the good to his fellow-man which he may be able to do 
by its means. 

4. The Law of Labor. Nature does not directly furnish 
man with the objects of desire now under consideration. She 
supplies only the raw material by which these objects may be 
obtained through, the instrumentality of human exertion. 
Through such exertion, bodily and mental, the wool of the 
sheep becomes clothing for man, the stone in the quarry be- 
comes the foundation for his house, the clay in the fields 
becomes the material for its walls, the wood of the forest is 
transformed into chairs and tables, and the material of the soil 



1. 6.] INTRODUCTORY VIEW OF TUB SUBJECT. 7 

becomes food. His desires being unlimited, while his means, 
that is, his labor, is limited to a few hours daily, he seeks to 
economize the latter so as to secure the greatest number of 
objects of desire. Hence a second fundamental proposition : 

Mankind continually endeavors to satisfy each separate 
want with the least possible expenditure of labor. 

On this simple law of human action is founded the science of 
political economy. The law is not a mere hypothesis, but a 
truth which is nearly universal so far as civilized men are con- 
cerned. Among partially civilized communities, whose desires 
are limited, the laws of political economy do not necessarily 
find any application. 

5. Origin of the Social Feature in the Want-supplying Me- 
chanism. If each man had to depend on himself for all his 
means of enjoyment, lie would, as compared with his actual 
condition, be as good as helpless. It is only by exchanging 
services with his fellow-man that the great mass of objects of 
desire can be attained. How important an element of civiliza- 
tion this is any one will see by looking around him and remark- 
ing how few even of the necessaries of life he would be able 
to command if they were not supplied him by his fellow-man. 
How many of us could make our own bread or clothes, or 
build ourselves the rudest kind of a house? 

Indeed, from the point of view of political economy, the 
great difference between civilized and savage communities is 
that in the latter each individual for the most part works for 
himself, while in the former each one labors for all the others. 

6. Let us see how far we may carry the conception of so- 
ciety as an organism. An organism is something which is not 
designed, but grows, and in which the acting forces seem to 
reside in all the molecules which make up the organism. For 
example, in the human body every corpuscle of the blood and 
every nervous fibre is endowed with certain activities which 
enable it to perform its own functions, and to minister to the 



8 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 6. 

good of the whole body. So in society. The molecules are 
individual men. The forces which bring about the great 
movements of commerce have their origin in individual de- 
sires — just as the nutrition of the body has its origin in the 
minute molecules of blood. As the will of a man does not 
determine how his blood shall circulate, nor how nutrition 
shall go on, so there is no one authority in the world who wills 
in what way men shall employ their labor or render services 
to each other. Leaving out individual cases, this is wholly a 
matter of private agreement between man and man, or between 
one body of men and another. We may compare the igno- 
rance of the workman as to who shall enjoy the products of his 
labor with the lack of knowledge on the part of each corpuscle 
of the blood as to the effect of its nutritive power. 

Although we may consider society as an organism, we 
must not carry the analogy with living organisms too far. 
There is one very important point in which society or the 
social organism differs from a plant or animal. We think of 
every plant and animal as having an individuality of its own, 
distinct from the conglomeration of organs which form it. 
Moreover, we cannot add to or subtract from the parts of the 
plant or animal without detracting from its character. A man 
cannot have three legs, and if he has only one he is imperfect. 
But there is no such completeness in the social organism. We 
can add new men to any extent, or we may divide a country 
into two without changing the character of the organism. In 
other words, it has no such attribute as individuality. By 
assigning such an attribute to it, and giving it a name, we may 
be led into confusion of thought. The people of each country 
and of each city may be considered to form a separate organism, 
but at the same time steam transportation has brought most of 
the world into such close communication that we may consider 
all these little organisms as parts of a great one, including the 
whole human race. 

The more closely and intelligently we look into the opera- 
tions of human society the more we shall marvel at the perfec- 



1. 6.] INTRODUCTORY VIEW OF THE SUBJECT. 9 

tion of its working. No man could ever have contrived such 
a svstem ; and had it been contrived, no men or combination of 
men could direct its work, any more than they could send the 
blood through the body of an animal. To the thinking man 
it forms one of the most interesting objects of study. There 
is nothing in the wonders of the heavens or the mysteries of 
chemical combination better fitted to kindle our curiosity, and 
to gratify our desire to understand what is going on around us, 
than the study of the social organism. 

We shall proceed in this study on a plan not unlike that 
which the physician follows in acquiring a knowledge of the 
human body. But as a preliminary step we shall have to enter 
upon some considerations of scientific method not necessary 
to the work of the physician. The reason of this is that our 
object of study is farther removed from the immediate sphere 
of sense than is that of the medical student. The latter studies 
the bodies of animals by actual dissection and by observation 
with his eye and with the microscope. But the economist can- 
not dissect society and make its component parts visible in the 
same way. The dissection is indeed to be performed, but only 
in imagination, by describing the different parts of which 
society is made up, and bringing in, not the real men who sur- 
round us, but abstract and generalized forms of these men, 
which bear the same relation to living men that a mental im- 
age does to a real object. To compensate for this substitu- 
tion of mental sight for eyesight, we need scientific method. 
The order of our studies will not be materially different from 
that of the medical student. Our first consideration is the 
anatomy of the organism, the forces which move it, and the 
manner in which the various parts are combined into a single 
harmonious whole. Having got a clear idea of what the or- 
ganism is, we have then to go into many details respecting the 
laws according to which it operates. Finally, we shall have to 
apply our knowledge of these laws so as to form intelligent 
conclusions respecting the effect of governmental action upon 
the interests of society at large. 



10 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 7. 



CHAPTER II. 

DEFINITION OF THE FIELD OF POLITICAL ECONOMY. 

7. Fkom what was said in the last chapter it will be seen 
that Political Economy treats of human desires, and the laws 
and conditions of their gratification under the circumstances 
in which men actually find themselves. But the field of 
human desires is by no means all included in Political Econo- 
my. Confusion of ideas often arises from not considering the 
limits of the subject. We therefore point out certain branches 
of thought which, though sometimes confounded with Political 
Economy, do not belong to it. 

There is a wide field of investigation included under the 
general term Sociology, or the science of society. The consid- 
eration of human desires in some of their aspects belongs to 
this field. Although the subjects treated of under the general 
head of Sociology all run into each other by insensible grada- 
tions, yet in that principal branch of the subject growing out 
of human desires we may recognize at least three divisions. 

Firstly, we may inquire how human desires originate, and 
how they are modified by the circumstances which surround 
the individual. Among these circumstances are his ancestry, 
his education, the community which surrounds him, and the 
government and institutions under which he lives. But this 
inquiry into the origin and growth of human desires is quite 
distinct from Political Economy. The latter takes the man up, 
ready-made as it were, and has nothing to do with the question 
how he got to be what he is. The reason for this distinction 
may be seen at once by reflecting that the laws which control 
the formation of character are distinct from those which de- 
termine the acts of men after their characters are formed, and 
therefore must not be confounded with them. 



I. 8.] DEFINITION OF TEE FIELD. H 

Secondly, we may analyze the desires and appetites of men, 
investigate their various good and evil tendencies, set forth 
their uses and abuses, and trace their ultimate effects upon the 
welfare of the individual and of society. This, however, is not 
the object of Political Economy, but of Moral Science. 

Thirdly, taking the desires and appetites just as they are, and 
regarding them merely as forces which impel men to action, we 
may investigate the laws of human activity to which they give 
rise. In other words, having given a community of men 
moved by certain desires, we trace out the laws which govern 
their efforts in seeking to gratify those desires. This and this 
alone is the object of Political Economy as a pure science. 

8. Illustrations. As an illustration of the difference be- 
tween the fields of inquiry just described, let us consider the 
case of a laborer who works industriously all day and then 
spends his earnings in strong drink. 

The sociologist, who is concerned with the laws of develop- 
ment, searches out the history of the man and his parents, and 
shows how, by the hereditary transmission of appetite, by 
early indulgence of his morbid taste, by the influence of evil 
companions, and by a lack of proper mental stimulus combined 
with exhausting bodily labor, his present deplorable character 
has been formed. The results which may be gained by this 
investigation will be of the greatest importance to one seeking 
the amelioration of humanitj 7 , but they will not belong to 
Political Economy. The political economist looks at the pile of 
earth thrown up by the man's shovel, shows that love of strong 
drink was one of the moving forces that inspired him, and 
reckons how much less work would have been done if he had 
not expected the tavern to be open that night. 

The moralist shows the man the destructive effect of his 
conduct upon his highest interests, and the suffering to which 
he exposes his family, and thus hopes to dissuade him from 
further indulgence. 

Finding his preaching vain, the moralist goes to the sociol- 



12 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 8. 

o^ist for instruction. Here lie learns that warnings are of no 
avail to one whose appetites are his master. The ever-pres- 
ent thirst overcomes all dread of the future. The man must, 
either by medical treatment or by physical restraint, be kept 
from gratifying the morbid appetite. The moralist desiring to 
employ only effective means, now appeals to the political econo- 
mist to know what effect various plans for foiling the aims of 
the drunkard will have. Perhaps he thinks that if he can in- 
duce the man's employer not 'to pay him in money but in 
bread-tickets, he will be no longer able to gratify his appe- 
tite. But the economist -will point out that this plan will 
be ineffective, because the man can exchange his tickets for 
money, and thus obtain the means of buying liquor. Again, 
the moralist will inquire whether by levying a heavy tax on 
spirituous liquor and thus advancing its price the man will not 
be discouraged from indulging it. To answer this question the 
economist collects statistics showing to what extent men are 
prevented from indulging their appetites by increasing the 
cost of the indulgence. As the result of an immense collection 
of facts he will show the moralist that nothing can be expected 
from this remedy. Perhaps his conclusion would be that the 
higher the price of liquor the more the man would spend upon 
it, and therefore the less money he would have for his family. 

The economist might say in conclusion, that within the 
range of his science no remedy could be found. His reason- 
ing might be : " It is very clear from the man's actions that 
he desires strong drink more than he desires bread or clothinsr 
for his family. I know of no way in which a man can be made 
to accept that which he desires less in preference to that which 
he desires more, except positive restraint." 

In all this the political economist would not be expressing 
any opinion upon the good or evil of the drunkard's desires. 
It is his sole business to trace cause to effect, and in doing so 
to accept things as they exist. But it must not be supposed 
that his conclusions are therefore of no value to the moralist. 
On the contrary, what the moralist most needs is to know 



I. 9.] DEFINITION OF TEE FIELD. 13 

the ultimate effect of the different remedial measures which 
may be proposed. It does not follow that because a benevo- 
lent man or a charitable association desires to do good its ex- 
ertions will really result in benefiting the community. For 
instance, it is now very generally recognized by thinking men 
that indiscriminate charity is a source of evil, in that it en- 
courages mendicancy and general helplessness. Whether all 
charity as actually practised does not in this way do as much 
harm as good is still an open question, and one which can be 
decided only by the investigations of the political economist. 
Economical science, therefore, considers man simply as an 
adapter of means to ends, but does not inquire how these ends 
arise, nor whether they are really the ends towards which men 
should strive. If this limitation seems unsatisfying to the 
reader, he must remember that the mixing up of different 
branches of inquiry is productive of confusion of thought, 
and that the questions whether an end is good and how an 
end can best be attained are totally different. 

9. It is neither necessary nor important, even were it pos- 
sible, that we should define with entire precision the point at 
which political economy stops in carrying out the line of in- 
vestigation we have indicated. A sufficient idea of its field 
may be given by saying that it includes the general subject of 
the laws of human welfare so long as we consider welfare to 
be only the gratification of desires. 

Wealth being directly or indirectly a potent instrument for 
commanding objects of desire, political economy is sometimes 
called the Science of Wealth. 

Again, objects of wealth being nearly all obtained by pur- 
chase and sale in public markets, the science has also been called 
the Science of Exchanges. 

"Economics" is a term introduced by recent English writers 
which has the double advantage of brevity and of avoiding 
the serious objections brought against the current term Politi- 
cal Economy. 



14 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 10. 



CHAPTER III. 

OF SCIENTIFIC METHOD. 

10. As a general rule the opinions of men on those sub- 
jects which immediately concern their interests as individuals, 
and in which the truth of the conclusions can be speedily 
tested by experience, are sound and correct. But when men 
step outside this limited field by entering upon the investiga- 
tion of wider-reaching subjects and more remote interests, 
error is the rule rather than truth. The reason of this prone- 
ness to error is that in all such cases there is but one way of 
being right, while the ways of being wrong are innumerable. 
A course of reasoning may change from right to wrong at 
any step, and thus the chances of being right at the end are 
very small unless thought is aided by correct guiding prin- 
ciples. Such principles are afforded by scientific method. 

In treating this subject we must begin by correcting a seri- 
ous misapprehension. This misapprehension consists in think- 
ing of scientific method as something wholly different from the 
method of drawing conclusions in every-day life. Although 
the following may not be considered a logically exact defi- 
nition of the subject, it is a description which the student 
should carefully bear in mind. 

Scientific method consists in applying to those subjects 
which lie without the range of our immediate experience those 
same common-sense methods of reasoning which successful 
men of the world apply in judging of matters which concern 
their own interests. 

It is not therefore some difficult and intricate theory to be 
learned, but rather the practice of a restraining discipline to 
keep the mind from wandering into vague speculation, and 
confine it to the analysis of each special case in hand. A 



I. 11.] OF SCIENTIFIC METHOD. 15 

distinguished English writer condensed the above description 
by defining science as simply " organized common-sense." 

11. The Problem of Scientific Method. Let us now 
look at the problem which faces us with a view of seeing 
how we are to apply common-sense methods to its solution. 
The situation is this : every man who reads the newspapers 
transacts business, and studies history is brought from day to 
day into contact with a great mass of facts. He sees going on 
before him the great operations of manufacture and commerce 
which we have summarily described in the opening chapter. 
The longer he lives the greater the number of events he will 
have in his mind. But the mere knowledge that such and 
such things have happened, that certain cities have been built, 
new states populated, new markets opened up, fluctuations in 
prices taken place, and particular changes in the tariff been 
made, is in itself of no use to him. The poorest day-laborer 
may know almost as much about what has been going on as 
he does himself. What the man wants to be able to do is to 
see into the future. If it is proposed to build a new railway, 
he wants to know what effect this railway will have upon the 
supply of goods brought to market. If a new silver-mine is 
discovered, he wants to know the effect upon the supply of 
silver and upon the coinage of money. If Congress changes 
the tariff, he wants to know the effect of this change upon the 
wages or profits he can earn, and upon the prices of the 
clothes he wears, of the food he eats, and of the goods he 
.buys and sells. Thus the problem before him is, by means 
of such knowledge as he has acquired from reading and ex- 
perience, to foresee in what way his interests or the interests 
of the country at large are going to be affected by changes 
and improvements in manufactures, commerce, and govern- 
mental policy. 

Here it is that scientific method must come into play. It 
shows him how he actually does go to work to form conclu- 
sions about the familiar facts of his daily life, and then it 



16 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 12. 

shows liim how to apply the same method to the larger problem 
before him. 

12. Form of General Propositions. In the application 
of scientific method all our conclusions must ultimately rest 
upon facts. But, as just shown, we cannot draw any sound 
conclusion from facts unless the circumstances are properly 
analyzed. If we have a fact or a series of facts we must in- 
quire, How did they arise ? According to what general rule 
did these things happen % These questions are answered, 
sometimes in a very imperfect way, and at other times more 
satisfactorily, by establishing certain relations between events; 
which relations are known by the name of laws of nature, or 
simply laws. 

A law of nature can only be expressed in the form of a 
conditional proposition. Its general form is : 

If a certain state of things be true, 
Then a certain result will follow. 

Examples of such propositions are as follows : 

If you touch gunpowder Math fire, then it will explode. 

If you leave a heavy body unsupported, then it will fall to 
the ground. 

If you bring a large extra supply of goods to market, then 
the prices will fall. 

If you lessen a man's income, then he will economize in his 
expenditures. 

If you increase the import duty on goods from abroad, 
then their prices will rise. 

If you give a man perfect freedom, then he will follow the 
course indicated by his feelings and his judgment. 

In these general statements, that which is supposed true and 
taken as the basis of the argument is called the Hypothesis ; 
that which then follows is called the conclusion. 

ISfow notice certain characteristics of all these propositions. 
In the first place, the conclusion is only hypothetically true. 
The hypothesis, commencing with an "if," is presupposed, 



1. 13.] OF SCIENTIFIC METHOD. 17 

and if it is not true the conclusion may fail. For example : 
if there is no heavy body, or, the body existing, if we keep 
it supported, there is no falling. Gunpowder has never ex- 
ploded within a hundred miles of the north pole. And in 
general all scientific conclusions are to be regarded, not as 
particular truths, but only as things which are or would be true 
under certain assumed conditions. The question whether 
these conditions do or do not exist is a matter of fact always 
open to challenge, and which we always have to decide in the 
best way we can. All that we can ask of the scientific state- 
ment is that the connection between the hypothesis and the 
conclusion shall be true. 

Again, we must never forget that, in addition to the hypothe- 
sis which we state, we always have to presume the negative 
hypothesis that nothing happens to change the conclusion. For 
example, when we say if gunpowder is touched with fire it 
will explode, then, in addition to the expressed hypotheses that 
the gunpowder exists and that you touch it with fire, we have 
the implied hypothesis that it is dry and in good order as we 
are accustomed to find it. When we say that an unsupported 
heavy body falls to the ground, we must implicitly assume that 
it is heavier than its own bulk of air, because if lighter than 
air, like a balloon, it will rise instead of falling. "We also 
assume that it is not held up by electrical or any other attrac- 
tion. If it is fired up from a cannon it will not fall to the 
ground immediately, though it must ultimately. Time will 
be required for the effect to follow. Thus, every general 
proposition may need to be modified in an infinity of ways 
when we consider it in its application to special cases. 

13. Induction and Deduction. General propositions can 
only be learned in the first place by a study of the facts of 
experience. The process by which we infer a general law 
from observed facts is logical induction. Induction is therefore 
the first step in the acquisition of exact knowledge. 

Deduction. The process of reaching a conclusion by means 

2 



18 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 14. 

of general propositions is called logical deduction. In strict- 
ness the process of deduction consists in chaining together a 
series of hypothetical propositions, the conclusion of each step 
being in whole or part the hypothesis of the step next follow- 
in o\ As a simple example of how a deductive process may be 
applied without thinking of logic, let us take our conclusion 
as to what will become of a piece of meat which a child drops 
over the surface of a pond stocked with fish. To reach the 
conclusion we have unconsciously in mind the separate propo- 
sitions, "An unsupported bod}' held over water will drop to 
the surface of the water ;" " A body heavier than water will 
sink ;" " If edible matter comes within reach of a fish he will 
eat it." By joining these several propositions we have the 
single proposition, " Heavy edible matter left unsupported over 
a pond stocked with fish will be eaten by the fish." But we 
must never forget to preserve a distinction between this gen- 
eral and hypothetical proposition and the concrete particular 
propositions, " This pond is stocked with fish;" "Mary let a 
piece of meat drop into the pond." We can reach a conclu- 
sion as to the actual matter of fact only by assuring ourselves 
of two things : first, that the existing state of things corre- 
sponds to the hypothesis ; and secondly, that there is a true 
general connection between the lrvpothesis and conclusion. 

14. Succession of Cause and Effect. In the process of 
deduction we suppose that there is a state of things corre- 
sponding to one or more of our hypotheses. From this suppo- 
sition we conclude, by the aid of the law, that another state of 
things, or conclusion, will follow. In this process, 

The first state of things is called the catise / 

The second state of things is called the effect. 

And, as already indicated, that general statement which ex- 
presses the relation between the cause and the effect is called 
the law. 

The distinction of cause and effect is only relative, not ab- 
solute ; an event is an effect in its relation to the preceding 



I. 15.] OF SCIENTIFIC METHOD. 19 

events out of which it arose ; but it is also a cause of the events 
which follow it in pursuance of a law. As a general rule, 
everything that happens is both a cause and an effect. 

It must be remembered that the relation of cause and effect 
is not one of mere succession, but of succession in pursuance 
of a general law. When a countryman at an inn pulled a bell, 
and immediately heard the gong sound for dinner, he inferred 
a relation of cause and effect between his effort and the sound 
which followed. He was clearly correct in his facts. "What 
was his error ? It consisted in inferring a general law of con- 
nection between the pull and the sound, when in reality there 
was no such law. 

15. Abstraction. All science presupposes that the events 
with which it is concerned are parts of a regular series of 
causes and effects, following each other in pursuance of general 
laws. Most events which actually occur in the world are the 
product of a very complex combination of causes, in which 
the silent hypothesis, " other conditions being equal," does 
not hold true, and in which the operation of every cause is 
altered by the concurrent action of a multitude of other 
causes. These causes are continually changing, so that it is 
generally impossible to infer a law from mere observation. To 
reach a rational result, we have to begin by considering the ac- 
tion of each cause separately. We are then said to make ab- 
straction of all the causes which we do not consider. 

The first steps in the construction of a deductive science 
consist in the abstraction of all but the most fundamental 
and widely diffused causes, and in investigating the succession 
of cause and effect as it would be if the action of these causes 
were not modified in any way. As an example of this let us 
take the science of mechanics. 

The motion of every body on the surface of the earth is the 
result of a great number of forces. We get at the effect of 
these forces by such a succession of steps as the following: 

First Hypothesis. We suppose a body acted on by no force. 



20 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 15. 

The conclusion is, the body will move forward in a straight 
line forever. 

Second Hypothesis. Wc suppose the body to fall under the 
influence of gravity, which we suppose constant. 

Conclusion. The body will fall a certain distance the first 
second, three times as far the next second, five times as far the 
third, and so on. 

Let it be remembered that neither of these hypotheses is 
ever fulfilled in nature. We never saw a body either acted 
on by no force, or moving under the influence of no force but 
gravity. Gravity itself is not the same at different heights. 
The same thing is true of all the fundamental conceptions of 
physics. We talk and think of bodies having no size ; of 
"material points;" of machines without friction, and so forth. 
We do all this to lay a foundation for further studies in which 
the causes first abstracted may be considered. 

So in Political Economy. We begin with a hypothetical 
man, animated by the one motive of gaining all the satisfaction 
he can by his labor, alive to his own interests, ready to turn 
his hand to a variety of things, and of such sound judgment 
that he makes no mistakes in his calculations. In other words, 
we at first make abstraction of all the little imperfections and 
variations from this ideal. We then make further hypotheses 
respecting the occupations he can engage in, and the appli- 
ances he can command, taking care to come as near as possible 
to the general average condition of mankind. Then we con- 
sider one by one the several variations from our first hypothe- 
ses, until we have gone as far as we deem necessary. 

Such hypotheses and the laws with which we connect them 
tell us nothing about quantities, and therefore do not suffice 
to reach practical conclusions. To answer the question, How 
much ? we have to study statistics of all kinds, and thus learn, 
with as much exactness as we may, the numerical quantities of 
all kinds, whether the numbers of various kinds of men, or the 
quantities of various productions, which enter into the prob- 
lems of our science. 



1. 16.] OF SCIENTIFIC METHOD. 21 

16. Pure and Applied Science. The preceding method 
leads to a distinction between pure and applied science. 

A pure science is one in which we consider only those 
causes whose action we can trace with clearness and certainty, 
and make abstraction of all others. 

An applied science is one in which we consider, in the best 
way we can, all the causes which come into play in some special 
class of cases, and thus, reach conclusions which we believe to 
need no further modification. 

Thus, there is a pure science of thermo-dynamics, formed 
on ideal kinds of matter, having properties never found in real 
matter. And there is an applied science of steam-engineering 
in which the special properties of the iron in the engine, the 
coal it consumes, and the steam it generates are considered. 

So with Political Economy. Pure economics is an ideal or 
hypothetical science in which we consider only the general 
characters of great classes of men, and those widely diffused 
causes whose action we can trace in the social condition of com- 
munities and in the great movements of agriculture, manufac- 
tures, and commerce. We thus form a single consistent system. 

In applied political economy we superpose upon the system 
of pure economics the causes which operate in some special 
case, and find how the conclusions of pure economics are thus 
modified. We may consider, for example, some peculiar state 
of things in a German town, or the economic effect of estab- 
lishing homes for newsboys in New York, or the effect of a 
strike in the building trade upon the interests of those engaged 
in it. 

The distinction between a pure and an applied science can- 
not be made a sharp one. As our knowledge expands, pure 
science is made to include a wider and wider field, and we can 
never say exactly where the line should be drawn. 



BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 17. 



CHAPTER IV. 

SPECIAL FEATURES OF ECONOMIC METHOD. 

1*7. Although the processes just described are common to 
all science, yet in the case of political economy they have to 
be applied in a way entirely different from that of physical 
science. The reason of this difference is that one great object 
of political economy is to foresee how men will act. Now, 
human acts are not governed by necessary and invariable laws 
of the class recognized in physics, but by will and choice. 
There is no law of nature which compels goods to be sent to 
the best market, or which requires men to dig mines and build 
steamships. Should we attempt to reduce the phenomena of 
manufactures, commerce, mining, etc., to the same kind of laws 
which prevail in inanimate nature, we should never get at any 
certain result, but might be wrong as often as right. Hence 
an investigator ignoring human will and motives and studying 
the work of mankind as if it were a product of natural forces 
would be at a great disadvantage. 

But we have a resource which compensates this disadvantage 
in our knowledge of the operations of our own minds. We 
each know individually that in deciding how we shall employ 
our time we are governed b}' a consideration of the relative 
benefits and evils of the various courses of action between which 
we have to choose. As a rule we choose that course which 
will yield us most good or pleasure. Looking at our fellow- 
men, we are irresistibly led to the belief that their acts proceed 
from like motives. We instinctively trace their actions to 
hopes, fears, and desires similar to those which animate our- 
selves. We feel that, like ourselves, they seek to reap the 
maximum of enjoyment from the minimum of disagreeable 
labor. 



1. 18.] SPECIAL FEATURES OF ECONOMIC METHOD. 23 

This conclusion is verified by universal experience. We 
never see men voluntarily wasting their labor unless the labor 
itself is a source of enjoyment. In no case do they spend more 
money or time on an object than is necessary for the purpose. 

The significance of our knowledge of human nature is this : 
it gives us an understanding of the forces at work in the social 
organism which we cannot command in the case of those living 
organisms with which we are familiar. We have already seen 
that the forces which animate the former are the desires and 
activities of individual men who bear the same relation to the 
whole organism that the molecules which make up an animal 
body bear to the body itself. But in the case of an animal we 
know nothing about the vital forces which animate the mole- 
cules, and can only study the organism from outside, as it were, 
while in economics we do know all about the motives which 
animate men in general, and can see how these motives lead 
to all the forms of human activity. The economist therefore 
has a great advantage over the physiologist in being able to 
understand the working of the minute machinery of which the 
physiologist remains entirely ignorant. 

18. The fundamental and most general hypotheses of po- 
litical economy may now be formulated as follows : 

1. That man is a being moved to action by an unlimited 
series of desires. 

2. That these desires can be partially satisfied by the exer- 
tion of those faculties, bodily and mental, with which the Crea- 
tor has endowed him. 

3. That he is a reasonable being capable of adapting means 
to ends. 

4. That in consequence of being a reasonable being he will 
exert his faculties in such a way as to secure the maximum 
gratification of desires with the minimum of inconvenience 
under the circumstances in which he is actually placed. 

Our science therefore recognizes all the complicated ma- 
chinery by which human wants are gratified as the result of 



24 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 18. 

the single prime moving force defined in § 2, namely, human 
desires. These desires are to be regarded as the first cause of 
economic effects. And this cause, considered in its relation 
to the effects produced, is not of the kind commonly investi- 
gated in physical science, but belongs to the class of final causes. 
The laws which prescribe how railroads shall be built, or when 
ships shall sail, or where manufactories shall arise, can only be 
laws of human action ; and such actions are determined by a 
final cause, the will of man. They are subjects of scientific 
investigation only because, as assumed in the third and fourth 
of the preceding hypotheses, we can foresee how men will act 
under given circumstances, by knowing what, from their point 
of view, will be the course of action best adapted to lead to 
their ends. 

It is sometimes considered that political economy makes ab- 
straction of every human passion or motive except the desire 
of wealth and aversion to labor, and that it represents man as a 
perfectly selfish being. But this is true only under a great 
modification of the sense in which we are to understand the 
terms used. Man is considered as a selfish being to this extent, 
and to this only, that he has his own desires which he is exert- 
ing himself to gratify. The desires themselves may be of the 
most benevolent kind. The labor of the Sunday scholar who 
is trying to earn a few pennies to put into the missionary-box 
may be included in the domain of political economy as well as 
any other labor. A man may spend his entire income in send- 
ing missionaries to the heathen or in charitable objects with- 
out violating the laws of political economy ; for it is certain 
that he will not spend his money in this way unless he desires 
to have the heathen converted or the wants of his fellow-men 
relieved. These benevolent desires are part of the man's na- 
ture as much as the desire for a good dinner is. They lead 
him into making the best bargains he can for himself in buy- 
ing and selling, just as other desires do, because the better 
bargain he makes the more money he will have for the heathen 
and the poor. 



I. 20.] SPECIAL FEATURES OF ECONOMIC METHOD. 25 

19. The Deductive Method. In so far as we can construct 
a purely deductive science of economics, based on the above 
hypotheses, our methods may be stated in the form of answers 
to two problems, as follows : 

Problem I. To foresee how men will proceed to attain any 
given end by their industry. 

Method of Solution. Discover, from the condition in which 
they are placed and with the knowledge which they possess, 
what seems to them the easiest way of attaining that end : that 
way they will adopt. 

Problem II. To find how men will spend their labor. 

Method of Solution. Discover, from the condition in which 
they are placed and from the character of their desires, in 
what way they can derive the maximum of enjoyment from 
their labor, in what way they will spend it. 

"Were our knowledge of the whole world, including every 
man in it, complete in every particular, and were we able to 
apply all this knowledge at every moment, we might imagine 
ourselves to predict all economic phenomena by this method 
much as the astronomer predicts the motions of the planets. 
Our knowledge being obviously so imperfect that we cannot 
predict in this way, the preceding solutions express, not our 
method of discovering facts, but our method of arranging them 
after they are discovered. That is to say, having learned from 
the statistics of manufactures and commerce what employments 
men engage in, we conclude that these are the employments 
from which they derive the maximum of enjoyment. We thus 
can put together our deductive chain by a reverse or inductive 
process. But, so far as the form of our conclusions is con- 
cerned, the final result is the same whether we reason in one 
direction or the other. 

20. Requisites for the Deductive Method. In order to 
apply the above method the economist must be supplied with 
three classes of data. 

First, the conditions which surround mankind. 



26 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 20. 

Secondly, the nature and objects of human desires. 

Thirdly, the extent and kind of knowledge which men 
possess on the subject of how they may secure the satisfaction 
of their desires. 

These several data can be found only by observation, and 
their discovery is therefore a process of induction into which 
abstract reasoning should not enter. Let us see in a general 
way what these data are. 

I. The general condition of man is one in which nature 
offers him an infinite variety of services, provided he will adopt 
the proper means to command those services. She offers him 
land by cultivating which he can supply himself with food ; 
she offers him coal on condition that he will dig it, and ores by 
smelting which he can supply himself with metals. She rewards 
him for every improvement which he will make in his tools. 
If he builds and properly equips a mill, she will turn it by the 
power of the wind ; if a steam-engine, she provides him with 
the expansive force of steam. But she offers very differ- 
ent gifts to different countries. One she supplies with a fer- 
tile soil : here man expends his energies in raising Avheat and 
corn. Another she supplies with coal and iron : here man 
becomes a miner. Another she supplies with timber and 
water-power : here man becomes a manufacturer. 

Men will find out for themselves these natural advantages 
very much sooner than a political economist can discover 
them for him; no inductive logic is therefore necessary for 
their discovery. 

II. The Character and Objects of Human Desire. The de- 
sire of men for special objects is in general to be learned from 
observation of their acts on a large scale, so that no general 
conclusion can be stated. But in the case of civilized men 
there is one general characteristic which lies at the bottom of 
the difference between his state and that of the savage. It is 
that he seeks to provide against his future wants, as well as 
to gratify his present ones. Hence his future happiness is an 
object of present desire. We shall see hereafter that without 



1. 21.] SPECIAL FEATURES OF ECONOMIC METHOD. 27 

this regard for the future no accumulation of wealth would be 
possible. 

Yet another feature of the desires of civilized man is that 
they are practically unlimited. If every man were satisfied 
as soon as he had accumulated the things necessary to supply 
his current wants, the whole fabric of economics would be 
changed. Our science takes account of the fact that great 
numbers of men accumulate all the riches they can, regardless 
of their already having enough for their own uses. 

III. Influence of Knowledge. Man seeks his ends, not 
necessarily in that way which is absolutely the easiest, but in 
the easiest way he knows. As his knowledge increases he 
discovers ways of increasing his power which he did not 
before know; and so important is this knowledge that it has 
been more instrumental in enabling him to improve his con- 
dition than his labor has. Thus, our knowledge of the expan- 
sive power of steam has caused the labor spent in making 
engines to be almost infinitely more efficient than would have 
been the same amount of labor without that knowledge. 

21. Limitations on our Knowledge of the Fundamental 
Data. Supposing ourselves to be equipped with a complete 
knowledge of all the preceding data, we might be able by 
deductive reasoning to predict and explain all human acts 
devoted to the production and enjoyment of wealth. Unfortu- 
nately, however, our knowledge is so limited that we cannot 
make absolute predictions as we can in a physical science. 
The reason is that many of the data belong to the future and 
therefore cannot be foreseen. Moreover, we know very little 
about individual men, and so we have to reason about them in 
large masses. Thus two limitations are placed npon our 
powers of foresight, which at first glance might appear fatal 
to our success as investigators, namely : 

I. ¥e know very little about each separate man ; we cannot 
tell what notion may enter his head, or how absurdly he may 
behave. 



28 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 22. 

II. "We do not know what causes may, to-morrow or next 
year, come into play to upset or alter our conclusions. 

But an examination will show that after all there is a great 
deal of value which we can learn, and that these limitations 
are not so destructive to satisfactory conclusions as they at first 
sight appear. Let us begin with a consideration of general 
or average results, to which we are confined by the first limi- 
tation. 

22. The Law of Averages. "What we are concerned with 
in political economy is, not the interests of single individuals, 
but those of society at large ; that is, the average interests of 
great masses of individuals. It is true, and we must never 
lose sight of this truth, that the community is made up of 
individuals, and that nothing can be beneficial to a community 
unless it be beneficial to some or all of its members. But 
since we cannot consider all the members individually, we 
must take general averages. 

Now it is a familiar fact that many events which considered 
individually are matters of pure chance occur witli extreme 
regularity in the long-run. A familiar example is the propor- 
tion of misdirected letters and of letters without direction 
which are dropped into great post-offices like those of London 
and New York. The number of such letters increases almost 
as regularly, from year to year, as the number of letters posted. 

Another example is afforded by the tables of mortality. 
Although out of the hundred thousand members of our largest 
Life Insurance Company it is impossible to say who will be 
living and who dead at the end of five years, the actuary can 
nevertheless predict the total number who will die within that 
time with hardly a possibility of being wrong by 5 per cent. 

As a third example the curious student may enumerate the 
names found in the directory of any large city, and find what 
proportion of them are Smith. This proportion, in cases 
where the numbers are large enough, will be found to vary 
wonderfully little from 1 in 85. At the census of 1880 the 



I. 23.] SPECIAL FEATURES OF ECONOMIC METHOD. 29 

population of Chicago was 500,000. This proportion would 
give 5882 Smiths, and we may conclude with much confidence 
that this result is within 5 per cent of the truth. 

The limitations to which economic investigations are sub- 
jected, so far as the law of averages is concerned, may be 
defined as follows : 

I. In cases where some individual opinion or habit is alone 
concerned, we cannot apply scientific method to determine what 
conclusion the individual will reach. For example, there is 
no law by which the economist can determine beforehand the 
salary which a railway manager or the President of the United 
States can command. Presidents are too few in number, and 
railway managers too diverse in the character of the operations 
which they control, to enable any reliable average to be fixed. 

II. But where the acts of thousands or millions of men are 
concerned, and where the question is to reach a conclusion 
respecting sums total in which the part of each separate in- 
dividual is so small as to be lost in the mass, we may apply 
scientific method. This is the case with nearly everything 
which concerns the great operations of agriculture, manu- 
facture, and commerce, the settlement of the country, the 
cultivation of the land, the raising of crops, their transporta- 
tion to market, the growth of manufactories, the prices of 
goods, and countless other results of human effort. When 
considered in the mass, these processes go on in accordance with 
definite and fixed laws, which scientific method enables us to 
understand and investigate. 

23. Unknown .Economical Causes. Suppose that we de- 
sire to know what a ton of Bessemer steel will be worth three 
years from the present time. It would be impossible for any 
economist to answer the question owing to the multiplicity of 
unknown causes on which the price may depend. The supply 
of crude iron, the discovery of new processes of manufacture, 
the number of railways to be built, the tariff to be levied, the 
wages to be paid, all come in to influence the result. 



30 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 23. 

But this does not prevent us from predicting what effect any 
given cause will have on the price with almost as much certainty 
as we can predict the properties of a chemical compound or the 
power of an engine. Suppose, for instance, that an economist 
is asked what effect a diminution of ten per cent in the tariff 
would have. Assuming him to be a master of scientific method 
and to have all the attainable data, he could give his answer 
with sufficient precision to afford a basis for action. The same 
remark would apply if asked what effect a rise in wages would 
have upon the price, or how the latter would be influenced by 
the building of a railway across the Asiatic continent which 
should require a great amount of the metal. In a word, the 
fact that we do not know all the causes does not prevent us 
from predicting the effect of those causes which we do know. 
In this respect political economy may be compared to a science 
which tells a traveller exactly how fast a vehicle of an}' kind 
will convey him, and at what cost per mile, but cannot give him 
any estimate of the total expense of his journey because its 
length is unknown. The science will be of value to him be- 
cause it will enable him to seek the cheapest and easiest con- 
veyance notwithstanding his ignorance of the absolute expense. 
We may even say that any criterion which will enable him to 
learn which conveyance is the quickest will be of the same 
value whether the length of the journey is known or unknown. 

Physiology and hygiene teach men the laws of healthy living, 
by following which they will be enabled to prolong their lives. 
But no science will tell a man whether he will be living or 
dead at the end of ten years. This, however, does not dimin- 
ish the value of the knowledge he actually possesses respecting 
the laws of health. So the economist may be able to say to 
the statesman who consults him about a proposed reduction of 
one dollar a ton in the tariff on iron, " I do not know what the 
price will be after the reduction you propose ; but this I do 
know, it will be fifty cents a ton lower than it will be if you 
leave the tariff unchanged, and the importation from abroad 
will be thirty per cent greater." 



I. 24.] SPECIAL FEATURES OF ECONOMIC METHOD. 31 

24. Summary of Results. The conclusions to which we 
are led by these considerations may be summed up as follows : 

I. The ability of mankind to secure those objects of desire 
for which they spend a considerable portion of the labor of 
their lives is subject to certain laws and limitations, and is 
affected by a multitude of causes. 

Examples of economic causes are : the greater or less abun- 
dance of the crops ; the building of new railways ; improve- 
ments in machinery and manufactures; changes in the fash- 
ions and public tastes on the subject of clothing; changes in 
the tariff on imported goods ; laws to regulate labor ; combina- 
tions among workmen ; increase of population ; the discovery 
of new mines of gold, silver, or other metals. 

II. Some of these causes cannot be known until after they 
occur ; others can to a greater or less extent be foreseen ; while 
yet others are the acts of individuals or of governments. 

III. Economics is the science which shows us how these 
numerous causes act, and thus enables us to predict the effects 
when the causes become known. This is done by taking the 
machinery of the social organism all to pieces, as it were, exam- 
ining its component parts, studying their mutual action and 
interaction, so as to learn the separate action of each cause. 

TV. But such predictions are generally confined, in the first 
place, to general average results as affecting either the whole 
mass of the community, or great classes of men, as farmers, me- 
chanics, laborers, etc. Their effects upon each individual may 
thus to a certain extent be foreseen, but we need not attempt 
to predict how any given individual will act in consequence. 

V. Such predictions are subject to the further limitation 
that the final result is liable to be modified by the coming into 
play of unknown or unforeseen causes. But this does not gen- 
erally alter the relative effect. 

YI. The economist has completely attained the object of 
his science when he has learned how to predict the effect of 
any cause whatever upon the interests of each class of men 
and not before. 



32 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 25. 



CHAPTER Y. 

FALLACIOUS VIEWS OF ECONOMIC METHOD. 

25. The object of the present chapter is to point out cer- 
tain misapprehensions respecting economic method, which are 
closely related to the subject of the preceding chapter. The 
most common mistake made by those interested in the subject 
is that of looking upon the propositions of political economy 
as real or pretended absolute truths which can be applied 
without regard to time, place, or circumstances. The fact is 
that these propositions are true only under certain conditions, 
which conditions may or may not admit of specification. Hence 
no one can correctly apply the method of economics without a 
clear appreciation at each step of the conditions which may 
modify the conclusion. The following is an instructive illus- 
tration : 

It is a general fact, accepted as the basis of an extended 
branch of economics, that by increasing the price offered for 
an article its manufacture is stimulated. The traders in a cer- 
tain South American port once found a profitable business in 
purchasing a particular kind of basket which the natives sup- 
plied at a very cheap rate. The price for which the traders could 
sell these baskets in their own country was so many times greater 
than that which they paid for them that they thought to in- 
crease their profits by offering a double price to the natives 
for the articles. The result was, however, that instead of the 
natives being stimulated to produce more of these baskets the 
supply was actually reduced to one half. Investigation showed 
that the natives needed only a limited quantity of the trinkets 
or money which they received for their baskets, and that they 
could not be induced to make more baskets than would supply 
them with this minimum. Accordingly, when they found that 



1.27.] FALLACIOUS VIEWS OF ECONOMIC METHOD. 33 

they could get their supplies in exchange for half as many- 
baskets as they had formerly made, their inherent idleness led 
them to reduce their manufacture. 

Here, then, was a case in which a law of economics was 
completely reversed. The explanation is that this law tacitly 
presupposes a state of things which exists only among civi- 
lized men, namety, a desire for all the money one can get and 
a little more. Change this condition, make man want nothing 
but coarse food, coarse clothing and shelter, and the whole sci- 
ence of economics will have to be reconstructed. 

26. The Doctrinaire's Error. Through failing to see this 
dependence of all economic propositions upon certain con- 
ditions men fall into two opposite errors. The first error is 
that of the "doctrinaire," who makes and applies sweeping 
generalizations without a detailed examination of the causes 
which may act to modify the results which he so confidently 
predicts. There can be no absolute conclusions in economics, 
and no result can be asserted as positive, until all the causes 
which may affect it have been considered. What the science 
does for us is, not to predict the result, but to show us the 
methods by which we can predict it ourselves when we know 
the causes and have measured the influence of each cause. It 
is not like a map in which is laid down every stone and pitfall 
in some mammoth cave, but rather like a lantern in the hands 
of an explorer by the aid of which he can discover till the 
stones and pitfalls for himself. 

27. The Popular Error. There is a large and influential 
body of men who view the subject from the same point as the 
doctrinaire ; that is, they assume that economic science should 
be, or at least that it pretends to be, a complete body of doc- 
trine which will enable the inquirer to get at truth by purely 
deductive reasoning. When they find this supposed pretension 
to be wholly unfounded, they conclude that we must either 
reject or completely reconstruct the science. We call this 

3 



34 BASIS AND METHOD OF ECONOMIC SCIENCE. [1. 27. 

view the popular one because it is one which men seem 
naturally prone to take. When the men who have studied 
economics in college go out into the world, they find that the 
phenomena they actually meet with are much more complex, 
and are affected by a much more intricate combination of 
causes, than are presupposed in the science they have learned 
from their books. In studying the latter they have been led 
to consider the science as something exact and positive ; and as 
they gradually find by experience of the world that it is neither 
exact nor positive, and that the actual course of trade often de- 
viates from that which they supposed to be marked out by eco- 
nomical theories, they too hastily conclude that the latter are 
worthless. The fact is that this defect is inherent in all science 
when we consider the latter in its practical applications. For 
example, the engineer student begins by learning a science 
which is called mechanics. If he applies the results of this 
science without any modification or allowance for circum- 
stances, he will find his calculations contradicted by the facts. 

Owing to this necessary defect a disposition to undervalue 
the practical usefulness of pure science is prevalent among all 
classes. Yet without science we should have nothing but 
vague speculation, inconclusive reasoning, and general confu- 
sion of thought ; while with it we have a collection of princi- 
ples which, although they cannot be blindly applied, are never- 
theless of inestimable value to one who understands them. 

A careful consideration of the process of abstraction (§ 15) 
will enable the student to see the origin of this difficulty in 
applying scientific conclusions. It is that the conclusions of 
pure science necessarily presuppose that no other cause than 
those which it considers comes into play. Now it is impos- 
sible in economics to consider every possible cause which may 
modify the result. All we can do is to trace out the action of 
general far-reaching causes as they affect great bodies of peo- 
ple, leaving it to the individual himself to see how they are 
modified by the peculiar circumstances of each case. 

Some writers require much more of our science than that it 



1.28] FALLACIOUS VIEWS OF ECONOMIC METHOD. 35 

shall be applicable without modification to the most complex 
phenomena of human society. They also demand that it shall 
be applicable to every state of things which their imagination 
can invent or their research discover. It is sufficient to say 
that such a requirement can proceed from nothing but defec- 
tive knowledge, since no science whatever in any form could 
fulfil such a condition. 

28. If, in thus rejecting all economic propositions, men had 
nothing to substitute for them, their views would have at least 
the merit of consistency. But there is a popular method of 
thinking on the subject which consists in tacitly assuming that 
whatever is seen to follow any cause is the effect of that cause. 
For example : to the question, "How would you determine the 
effect of a change in the tariff ?" the answer of the majority is, 
" I would wait and see the effect." This method is defective 
because every fact that we can observe is the product of a mul- 
tiplicity of different causes. For example, a fall in the price 
of iron may arise from the discovery and opening up of new 
mines, from a falling off in the building of railways, from a di- 
minished demand from abroad, from the discovery at home or 
abroad of improved methods of manufacture, as well as from a 
change in the tariff. In consequence it might well happen 
that after the tariff on imported iron was raised the iron would 
be cheaper than before, and that it might be dearer after the 
tariff was lowered. It would therefore be illogical to conclude 
that the fluctuations in price were due to any one cause until 
all the causes were investigated. This example should make 
it perfectly clear to the student that there is no rational method 
of tracing cause and effect in economics, except to begin by con- 
sidering the action of the various causes one at a time. 

But the main defect of the popular method is that of ignor- 
ing what we may call the self-sufficiency of man, and of looking 
upon man as a victim of blind forces which he follows as a leaf 
follows the course of the wind. The fact is that men in mak- 
ing their bargains and doing their work are not the creatures 



36 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 29. 

of any such, forces. They may be relied upon to take the best 
possible measures for guarding their own interests, and their 
movements are determined by their own wills and not by any 
blind laws which we can formulate from statistics. 

29. This way of looking at economic phenomena is so natu- 
ral that some illustrations of its dangers may be adduced. Let 
us suppose an investigator seeking to learn the relation between 
quinine and the public health by statistical observation. He 
might reason thus: "If quinine conduces to the cure of inter- 
mittent fever, then where people take most quinine they will 
have least intermittent fever, and each new importation of 
quinine will be followed by an improvement in the public 
health. But looking at the facts of the case, we find them to 
be directly the reverse of this. In the low lands along the 
lower part of the Mississippi valley and among the swamps of 
the Gulf States people take more quinine than anywhere else 
in the country. Yet, far from being more healthy, the}^ suffer 
from intermittent fever more than any other people. Not only 
so, but we find that the large importations of quinine which 
take place annually in the summer are regularly followed in 
the autumn by an increase in the frequency of intermittent 
fevers. Therefore let the advocates of quinine propound what 
abstract reasons they please, the facts are against them and 
show conclusively that quinine causes intermittent fever in- 
stead of curing it." 

This example belongs to the class which the reader who 
desires to train himself in habits of accurate thought should 
study very closely. What is the defect in the logical process 
by which the conclusion is reached ? We have a phenomenon, 
intermittent fever; we have a cause, quinine. The relation of 
the two is fully proved. The only question that can arise is 
whether the fever is the cause of the quinine or the quinine 
the cause of the fever. Since the introduction of the quinine 
precedes the annual breaking out of the fever, we have in the 
former hypothesis the apparent difficulty tliat the effect comes 



1.30.] FALLACIOUS VIEWS OF ECONOMIC METHOD. 37 

before the cause. To the average unthinking man, looking at 
society from the outside, this difficulty would be insurmounta- 
ble. But when we recognize in men the quality of adapting 
means to future ends, we see that if we arrange events accord- 
ing to the order in which we observe them the effect may pre- 
cede the cause. The general cause of the annual importation 
of quinine is the belief on the part of great bodies of men that 
the fever will break out. !Now, belief is a mental state leading 
to action on the part of men ; and if we ignore it, and the con- 
sequent adaptation of means to future ends, we not only lose 
a valuable means of explaining economic phenomena, but we 
run the danger of falling into error. 

The reader may inquire whether there is really any danger 
that people should fall into errors so gross as that above sup- 
posed. We reply by asking, Why do they not fall into that 
very error ? The reply to this last question is that the error 
itself is so obvious that there is no danger of falling into it. 
The common-sense of the average man familiarizes him with 
the whole process. Common-sense is the lantern by which he 
sees the relation of things. But if the process is not familiar 
to him, if this lantern does not shine, then he is in darkness 
so far as this way of seeing his error is concerned, and he will 
inevitably fall into mistakes of the kind above illustrated. We 
have only to read the newspapers and the writings of great 
numbers of intelligent men to find any quantity of reasoning 
of the form of that above given ; and how are we to know when 
its conclusions are right and when they are wrong? 

30. At first sight it may seem discouraging to the student 
to ask him to devote much close thought to a science all of 
whose rules and conclusions are imperfect. But there is no 
occasion for such discouragement. If he has carefully mastered 
the spirit of this and of the preceding chapter, he will see that 
the imperfections which we have just been describing are only 
those which are common to all human knowledge. No knowl- 
edge of the future affairs of mankind is perfect, because we 



38 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 30. 

cannot possibly tell what causes may come into play to disap- 
point our expectations. But notwithstanding these imperfec- 
tions, we can form more or less probable judgments of the 
action of causes and effects in the world generally which are of 
the greatest value. The imperfections of political economy are 
less than those of meteorology. 

We may compare the prediction of a specific future eco- 
nomic event to an attempt to predict the weather on the 8th 
of January of some future year. "We can make no such pre- 
diction with any approach to certainty. Are we to conclude 
from this that no attempt to foresee changes of weather and of 
seasons is of any value ? Not at all. We know that the sea- 
sons go through an annual course ; that the weather is hot in 
July and August, and then on the average grows colder until 
January. We make our plans for seed-time and harvest, for 
winter fuel and summer journeys, with well-founded confi- 
dence that the changes of seasons will go through their regular 
course. Now, rejecting the conclusions of political economy 
on the ground that, being uncertain, they can be of no practi- 
cal value is like rejecting all the rules about seed-time and 
harvest because meteorology can never tell us what kind of 
weather we shall have on any particular day. We must do in 
economics just as we would do in the scientific investigation of 
all other general causes. We must frame hypotheses which 
shall come as nearly as possible to the general average of things 
as they exist in the world. Every observing man has fairly 
clear ideas as to how men in general act ; that is to say, he has 
a certain conception of an average or typical man. From this 
type every man we meet may differ in some detail, yet it strikes 
a general average amongst them. But it does not at all follow 
that we are to stop here and assume that no other man than 
this average one exists. We may go on and classify men in 
regard to their differences from the average man to any extent 
we please. What we have to do is to be careful that our classi- 
fication corresponds as nearly as possible to the actual charac- 
teristics of men. 



LSI.] FALLACIOUS VIEWS OF ECONOMIC METHOD. 39 

We have to carry the same system through our whole study. 
We must at every step distinguish between far and wide reach- 
ing average causes affecting large classes of men, and the tem- 
porary disturbing causes which sometimes act in one direction 
and sometimes in another. By proceeding in this way we shall 
find human society to be a most interesting and satisfactory 
object of study, in which we can trace the action of cause and 
effect with nearly as much certainty as we can trace out any 
system of natural operations going on in the world. 

31. With fallacies respecting economic method we may 
associate certain imperfections in ways of thinking to which 
mankind are prone, and which every student of science should 
carefully train himself to avoid. The most common defect of 
this kind is that of confounding statements of how things are 
with statements how we would like them to be, or how things 
might or ought to be. Those who pursue inquiries in a purely 
partisan spirit, for the purpose of proving some theory or 
bringing about some result, are naturally prone to this defect. 
The defect sometimes reaches such proportions that the person 
affected by it becomes incapable of understanding a truth sim- 
ply as a truth, and cannot conceive the state of mind of one 
who describes things as they are without any ulterior purpose. 

Now science is primarily concerned with things as they are. 
Just as no astronomer ever claimed that Jupiter was any too 
large, or that those nearly invisible little planets which are 
being discovered every year are a great deal too small, so the 
economist, considered as a purely scientific inquirer, pursues 
his investigations without any spirit of praise or depreciation. 
His business is to describe human society exactly as it is, feel- 
ing that the question how he would like it to be, or how it 
ought to be, belongs to another branch of the subject. 

It does not follow from all this that the student of economics 
or any one else should divest himself of human sympathies and 
refuse to consider what men ought to do to promote their in- 
terests. It is not necessary that he should absolutely confine 



40 BASIS AND METHOD OF ECONOMIC SCIENCE. [I. 31. 

himself to what we have above defined as the field of scientific 
economics. But what he must carefully do is to distinguish be- 
tween his thoughts as a scientific economist and his feelings as 
a promoter of human welfare. The defect we have described 
does not consist in a person feeling an interest in how things 
ought to be, and how ends can be attained, but it consists in 
confusing this feeling with statements of fact. We cannot 
form the best judgment of what society ought to do to promote 
its own welfare until we understand as well as possible what 
the state of things in society really is. We must therefore 
begin by studying economical causes without any sentiment of 
praise or blame, and without any feeling that we wish they were 
otherwise or that we are glad they are as we find them. When 
we have done this, and not before, we shall be able to form an 
intelligent judgment about questions of the policy which society 
ought to pursue in order to secure its own well-being. 

A common mistake is that the conclusions of the plain un- 
lettered man differ from those of economists in being more 
immediately founded on observed facts and less on deduction. 
The truth is that the plain unlettered man is more prone to 
rely on deduction from unproved hypotheses than the econo- 
mist is. All classes must equally use deduction, because it is 
only by this logical process that we form any conclusion about 
the future effect of any present cause. Drawing the conclu- 
sion that rain will follow a certain direction of the wind with 
certain appearances of the clouds is an act of logical deduction. 
The main point in which men's logical methods differ lies in 
the care with which hypotheses are formed by induction from 
observed facts, and the readiness of men to test them. Now 
it is the plain man who is most prone to form hasty generaliza- 
tions from insufficient facts, to consider the conclusions which 
he thence deduces as final, and to be blind to all facts which do 
not tally with his theory. One object of science is to train 
men into the habit of carefully taking account of all facts 
whether they do or do not agree with, their hypotheses. 



ILLUSTRATIONS AND EXERCISES. A\ 



ILLUSTRATIONS AND EXERCISES. 

1. By virtue of the force of gravitation acting on its waters, a river 
tends to flow in a smooth and equable course from its source to the sea. 

The doctrinaire is one who hence concludes that all rivers flow in straight 
lines to the sea, and rejects all testimony that the course of many rivers is 
exceedingly tortuous. 

The "practical" or unscientific economist is one who, finding the river 
to wind about in all directions, denies or ignores any special tendency in 
its waters to approach the sea, and regards the idea of those waters being 
urged forward by any one single force, like that of gravitation, as entirely 
illusory. 

The common-sense economist is one who recognizes all the meander- 
ings of the river, yet never forgets that its waters are at every point of their 
course urged toward the sea by the single force of gravitation, and that they 
change their direction, not because the force is nullified, but because its 
direction is modified by the hills, rocks, and other obstacles it is continually 
encountering. So, in economics, he never forgets that the one cause which 
keeps all the wealth-getting processes in operation is the desire of wealth by 
each individual man, and never fails to recognize any case in which the 
action of this cause is modified by circumstances. 

2. It is laid down as a general principle in economics that there can- 
not be two rates of wages in the same community for the same kind 
of work. A man was discovered in New York who paid his coachman 
twice the wages that other people paid for the same services for no better 
reason than that the coachman had been a favorite of his father's. To what 
extent, if at all, is it necessary to modify the doctrine of the equality of 
wages in consequence of this discovery ? 

3. Can you give any reasons for or illustrations of the proposition 
that the impartial study of things as they are must precede our considera- 
tion of any or all questions of policy? 

4. Consider the following view of the cause why men tend to congre- 
gate in great cities; state your opinion of its correctness, and, if you think 
it wrong, state the cause in a form which you consider correct: 

"Men tend of necessity to gravitate towards their fellow-men ; the greater 
the number collected in a given space the greater is the attraction there 
exerted — as is seen to have been the case with the great cities of the ancient 
world, and is now seen in the great cities of modern times. London and 
Paris may be regarded as the rival suns of our system, which exercise a 
strong attractive force; and were it not for the existence of a counter-attrac- 
tion of local centres like Vienna and Berlin, Florence and Naples, etc., 



42 BASIS AND METHOD OF ECONOMIC SCIENCE. 

Europe would present to view one great centralized system, the population 
of which was always tending towards those two cities, there to make all 
their exchanges and thence to receive their laws." (Carey, Principles of 
Social Science, Chap. II. Sec. I.) 

Consider principally the question whether if the lesser capitals did not 
exist there would be a greater tendency towards the great ones. Is there 
any such attraction as that described, and, if so, what is its nature? 

5. "Science requires laws, and laws are but universal truths, truths 
to which no exceptions can be found." (Ibid., Chap. I. Sec. VI.) 

State under what limitations of meaning, if any, this proposition is cor- 
rect. Can you think of any law which will enable you to foresee what will 
happen to-morrow with absolute certainty? Is there any law to which no 
exception can be found? If not, is it fair to suppose that laws are of no 
use? 

6. Were you to invent a new form of steam-engine" and could you find 
but two persons to consult with, the one a practical engineer who had spent 
his life in running a particular kind of engine but knew nothing of the 
theories of thermo-dynamics, the other a mathematician who had mastered 
thermodynamics but had never seen an engine at work, which would you 
regard as the better authority for advising you how your engine would be 
likely to succeed ? 

Can you form any general definitions of the class of questions which 
could ba best answered by the mathematician and the class which could 
best be answered by the engineer ? 

7. Can you apply any general principles of the kind suggested by the 
preceding question to the case of advising a government on a financial 
question ? If the Mexican Government desired to raise a loan in the New 
York money market, would it act more wisely in consulting the bankers of 
New York or the political economists ? If it proposed to introduce a new 
system of currency such as had never before been tried, ought it to consult 
the bankers or the economists ? 

8. In continuation of the same subject. If we admit the principle that men 
of most experience should always be consulted upon a difficult question, 
in what class of questions should we say that practical bankers had more 
experience than economists, and in what class should we say that economists 
were more experienced than bankers ? 

9. Examine and criticise the following objection to the practical value 
of scientific method: 

Scientific method considers the course of events as going on in accord- 
ance with certain formal laws the results of which it shows us how to 
predict. Now if all the phenomena with which men are concerned went 



ILLUSTRATIONS AND EXERCISES. 43 

on in this formal way, our scientific method would be very valuable. But 
in fact, a great majority of the events with which men are concerned are the 
result of such a multitude of causes that they cannot be reduced to these 
simple laws. Scientific method is of no value in such cases, and the result 
must be a matter of practical judgment. 

Consider the soundness of this proposition in the light of such questions 
as the following: 

Is scientific method more or less necessary because we cannot formulate 
a set of principles which can be applied without modification to all cases ? 
If a new kind of railway bridge is to be built, it may be found that no ex- 
perience gained from other bridges and no calculations made for them will 
apply to the case of the new bridge under contemplation. Does this inap- 
plicability of experience render scientific method more or less necessary in 
making calculations for the proposed bridge ? 

10. Compare the following two cases: first, that of a miserly selfish man 
whose energies are devoted entirely to the accumulation of wealth for him- 
self; secondly, that of a man who devotes his labor and his fortune to the 
relief of suffering humanity. Is there any difference in the method of in- 
vestigation which we have to apply to the two cases? Is it or is it not true 
that the men are equally following the bent of their nature ; and that the 
relation between their nature and the acts which we see them perform are 
the same in the two cases ? 

Nearly all of us contemn the first of the above men and love the other. 
Is the existence of these sentiments of love and contempt of use or benefit 
in the work of analyzing the nets of the men ? 

11. Examine and criticise the following objections to the method and 
hypotheses of political economy as laid down in Chapter IV. : 

I. We cannot make these general hypotheses of human nature the basis 
of any reliable investigation into economic phenomena, because these phe- 
nomena depend upon a great variety of circumstances not included in the 
hypotheses. Every successive generation is placed under new conditions, 
and the circumstances which surround every people are different in impor- 
tant points from those which surround other peoples. 

II. It is very unsafe to assume that men always act reasonably in 
adapting means to ends. The fact is, man is a very uncertain and variable 
being, and it is a good deal safer to assume that we find him just as we 
see him act than to frame any theories founded on his nature or mental 
constitution. 

III. The conditions of different nations being different, we cannot frame 
any system of political economy which will apply to more than one nation. 
Hence any idea that there is a general science of economics is without 
foundation. 

"With reference to the first objection, consider and decide whether in 



44 BASIS AND METHOD OF ECONOMIC SCIENCE. 

assuming the hypothesis of § 18 we are obliged to ignore any of the con- 
ditions or circumstances which surround mankind. 

In reference to the third question, consider whether there is anything 
common in the economic phenomena of different civilized nations. Is 
the general system of producing, transporting, and selling goods radically 
different in Germany, England, and America — that is to say, are there any 
features of these processes common to all these countries? 

12. What is the fallacy, if any, in the following reasoning ? 

Where we see fine marble houses, public fountains, and paved streets 
we know that people are wealthy. Therefore if a community would be- 
come wealthy as fast as possible it must proceed to the erection of marble 
buildings, the paving of streets, and the construction of fountains as rapidly 
as possible. 

13. When in 1885 the government invited bids for supplying iron beams 
for the new War Department building in Washington, it was found that 
the lowest bidder knowingly agreed to supply the beams below the lowest 
price at which he could buy them. Is it to be supposed that he did this 
from patriotism, from a desire to benefit his country, or from other motives 
forming an exception to the hypotheses of economics? 



BOOK II. 
STRUCTURE AND FUNCTIONS 



OF THE 



SOCIAL ORGANISM. 



BOOK IL— DESCRIPTION OF THE SOCIAL 
ORGANISM. 

Division A.— Definitions and Outline. 



CHAPTEK I. 

OF WEALTH AND ITS ASSOCIATED CONCEPTS. 

1. Remarks on Economic Nomenclature. An exact no- 
menclature is one of the first requirements of an exact science. 
But economics is so peculiar in its nature as to render this 
requirement very difficult of fulfilment. In most other sci- 
ences things are classified according to their own inherent 
qualities. But in the present one things have to be classified, 
not merely with respect to such qualities, but rather according 
to their relation to human desires. We have to associate things 
so purely mental as human hopes and fears with things so 
purely material as ships, ploughs, and steam-hammers. Thus 
we encounter the necessity of arranging things with reference 
to the mental emotions which they are calculated to excite. 
One consequence of this is that an object which may belong- 
to one class if owned by one person may belong to a different 
class when he sells it to his neighbor. Such anomalies are 
inherent in the subject, and can be reduced to order only by 
the reader keeping well in mind what is meant in each par- 
ticular case where terms of peculiar signification are applied. 

As a rule, no new words have been introduced into econo- 
mics. What has been done is to extend and generalize the 
meaning of familiar words. Such words we shall now proceed 
to define. • 



48 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 3. 

2. Labor. In its widest economic sense labor is any ex- 
ertion of the human faculties for the attainment of a definite 
object. This definition is merely an extension of the familiar 
one. The latter includes only physical exertion. But in 
economics the exercise of the judgment and imagination finds 
as important a place as that of the body. Hence the mental 
occupations of the lawyer, the author, the. clergyman, and the 
actor belong to the same class as the bodily exertions of the 
common laborer. The}' are equally necessary to the gratifica- 
tion of the general desires of the community. 

Although no harm would result from our using the word 
labor in the above extended sense, yet in practice we limit it 
as follows : Labor is exertion of the human faculties devoted 
to the production of any object or effort for which other per- 
sons than the laborer are, or might be, willing to pay. In 
familiar language, labor is all that any one does in order to 
make a living. 

3. Wealth. In economics the term wealth, in its widest 
sense, designates all those things which men gain by labor, and 
employ to gratify their desires. 

Economists have sometimes been divided on the question 
how far anything not material could be considered wealth, and 
also whether the term should be confined to objects the use of 
which could be transferred from one person to another. It 
will not be profitable at the present time to enter into a dis- 
cussion of this question further than to say that it seems advan- 
tageous to consider the word in its more extended sense ; but, 
at the same time, to confine it to actual objects of desire, 
material or immaterial, transferable or not. The understand- 
ing of the definition will be facilitated by enumerating the 
principal classes of objects which may be included in the 
term. They are : 

L All the lands and mines of the country to which labor 
has been applied to make them productive of edible plants, of 
animals, or of minerals. 



II. 4.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 49 

II. The improvements in and upon the land designed to 
facilitate production, such as roads, fences, storehouses, barns, 
etc. 

III. All appliances which men have made for the manufac- 
ture, transportation, preservation, and sale of the products of 
industry, including railways, manufactories, etc. 

IY. The houses in which we live, together with the furni- 
ture, pictures, and everything else which they contain intended 
to promote our ease and pleasure. 

Y. All products undergoing the processes of manufacture, 
transportation, and sale to those who finally use them. 

YI. Clothing, food, books, and all other manufactured pro- 
ducts in possession of those who are to wear or use them. 

YII. The skill, business ability, or knowledge which enable 
their possessors to contribute to the enjoyment of others, includ- 
ing the talents of the actor, the ability of the man of business, 
the knowledge of the lawyer, and the skill of the physician, 
are to be considered wealth when we use the term in its most 
extended sense. 

If, instead of discussing the definition in detail, we inquire 
what is the understood sense in which the word is used in eco- 
nomics, we shall find the definition to be : Wealth is that for 
the use or enjoyment of which people pay money. 

4t. Of Property or the Right to or Ownership of Wealth. 
It is necessary in every branch of economics to bear carefully in 
mind the distinction between the objects, material or immate- 
rial, which constitute wealth, and the ownership of 'or rights in 
those objects, which secures the proper party in the enjoyment of 
the wealth. In many cases it is difficult to make the distinction, 
owing to the very general or abstract nature of the object pos- 
sessed ; but its importance requires a very careful and critical 
examination on the part of the student. The understanding of 
the subject will be facilitated by taking it up in special cases, 
beginning with the most familiar ones, before we proceed to 
any generalization. 
4 



50 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 5. 

Here is a suit of clothes. That suit of clothes is capable 
of protecting some one person from .the inclemency of the 
weather. Since it can protect only one person at a time, it 
follows that there must be some law or general understanding 
to determine a person having an exclusive right to it. The 
person so determined is called the owner of the clothing ; the 
clothing is called his property ; he has the sole right to the 
use and enjoyment of the clothing, and this right is called 
ownership. We have thus four words all of which are rela- 
tive : owner, which designates the person, but which also im- 
plies his relation to the clothing ; property, which designates 
the clothing in its relation to the owner; ownership, which 
designates the relation between the two ; and right, which 
may be considered as giving force to this relation. The word 
wealth, on the other hand, designates the object absolutely ; 
that is, not in its relations to any particular person. So far as 
the mere object is concerned, property means the same thing 
as wealth ; it differs in being relative to some owner. 

If this distinction of absolute and relative terms for the 
same object offers any difficulty to the student, he may make 
the subject clear by considering that a body of men may all be 
brothers. Hence to a certain extent man and brother may 
mean the same thing. The difference is that the word man 
is an absolute term designating the individual just as he stands, 
whereas when we call him brother we imply his relation to 
somebody else, either a sister or another brother. Of the same 
general nature is the difference between the word wealth, 
which is either absolute, or relative only to the community at 
large, and property, which considers it relative to the owner. 

5. Of the Owners of Property. The owner of property 
may be an individual, a society, or an indefinite number of in- 
dividuals called the public, whose collective personality is em- 
bodied in a conception called society, the government, or the 
state. Any individual or society legally capable of becoming 
an owner of property is called a legal person, or simply a 



II. 5.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 51 

person. Examples of such persons are mercantile firms, 
banking and railway companies, and incorporated societies, as 
well as individuals of legal age. 

Different Forms of Ownership. Considered in its relation 
to the three classes of owners, property may be divided into 
public, joint or corporate, and individual. 

Public property we may consider to be owned by the state, 
or by society at large. The roads on which we travel in the 
country, the streets and pavements of a city, the fountains and 
statues which ornament it, and the pipes which supply it with 
water, are examples of this sort of property. That is, all 
these kinds of w r ealth are equally possessed and enjoyed by 
everybody who can use them. 

Joint property is that the owner of which is any definite 
body of persons. When this body is specially organized by 
law it is called an incorporated company, and the property is 
called corporate. In economics we have no occasion for any 
distinction between corporate and other forms of joint prop- 
erty. 

Individual property is that owned by an individual. Each 
member of an association has an indirect or secondary right in 
the wealth owned by the association, so that there are two 
distinct orders of ownership. An example of this is afforded 
by a railway. The wealth is not only the railway itself, 
but the buildings, engines, cars, and other appliances neces- 
sary to its running. The owner of the railway as a whole 
is a body of men called a railway company. Considered in its 
relation to this owner, the property in the railway is called 
stock, and the stock is divided up into small parts called 
shares. The shares again are possessed separately by the in- 
dividual men who form the company, each man owning a cer- 
tain number, which are then his individual property. Here 
we have no difficulty in distinguishing between the stock or 
shares, which make up the several properties of the indi- 
vidual owners and the wealth consisting of the railway it- 
self and the various appurtenances connected with it, which 



52 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 6. 

exists independently of changes in the ownership. The same 
principles apply to manufacturing and commercial companies. 
The individual ownership of wealth is subject to an infinite 
variety of modifications. In economics the most important 
modified forms are credit and divided, ownership, which we 
shall next define. 

6. Credit. The right held by the owner of credit is that 
of requiring from some other person or owner at a future time 
the payment of a designated sum of money. The holder of 
the right is called the creditor • the person against whom he 
holds it, the debtor. The debtor, whom we may consider as 
the present owner of the money to be paid, may be any kind 
of legal person, an individual, a company, or a government. 
But the right possessed by the creditor is apparently neither 
the ownership of anything which comes under our defini- 
tion of wealth, nor that of any material object. The right to 
demand money from another party is not the same thing as 
the ownership of money. Let us take for example a promis- 
sory note by which the drawer, D, is under an obligation to 
pay the holder, A, a sum of money. Now although ideally 
this sum of money is a certain weight of gold or silver, yet 
there are no particular pieces of gold or silver which con- 
stitute the wealth. It may very well happen that the sum of 
all the moneys to which the members of the community have 
rights expressed by promissory notes exceeds many times over 
the money which actually exists in the community. 

The difficulty in this case will be avoided, and the case 
brought under our general definitions, by looking at another 
feature of the case. Every right of this class is accompanied 
by a corresponding obligation on the side of another party ; and 
the right and obligation are mutual and equal in amount: 
where one ceases the other ceases also. There cannot be a 
creditor without a debtor. Now the most accurate way to 
consider the subject is to regard the right possessed by the 
creditor as algebraically positive property, and the equal 



II. 7.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 53 

obligation on the part of the debtor as algebraically negative 
property. The sum total of property possessed by the com- 
munity is not altered by one member owing another ; because 
equal credits and debits cancel each other, just as positive and 
negative quantities do in algebra when they are added. 

Thus, if D is indebted to C in the sum of x dollars, we 
conceive that D's ownership does not extend to the whole of 
the money or other wealth which is in his possession, because 
such ownership is diminished x dollars by the debt. If w 
represents the whole quantity of money which he is to possess 
when the debt becomes due, his property in that money is 
w — x, and C's property is x. The sum of these properties 
makes up w, the quantity of money in question. 

7. Divided Property. Credit involves a special kind of 
divided property. But there are modified ownerships of 
many kinds, of which the following is the most important. 

A person may have a right of property in an estate, not 
by virtue of owning any part or share of it, but by enjoying 
the right to demand from its owner, no matter who he may be, 
a sum of money, and to seize the estate, or require its sale, in 
case the corresponding obligation on the part of the owner is 
not fulfilled. The property owned in this case is in the nat- 
ure of credit, but it differs from the credits described in the 
last article in that the property inheres in a particular piece of 
wealth, namely, the estate which is pledged to the payment of 
the debt. The property is then divided between the two 
owners as follows : if x be the total value of the estate, and 
n the amount of the debt upon it, the creditor's share will be 
n and the owner's share of the estate will be x — n. Both 
values together will make up the value e of the estate, as it 
should. The method of representing the property algebrai- 
cally is the same in the case of simple credit. 

Debts of all kinds come under the rule that they are 
necessarily offset by corresponding obligations on the part of 
some one, and therefore form no part of the total property of 



54 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 8. 

the community. In the case of government, state or muni- 
cipal bonds of any kind, the debtors comprise all the property- 
owners in the community, who must be taxed to pay the debt, 
and in any estimate of the total value of property each man's 
share of the amount due should be subtracted from the value 
of his individual possessions. The result of the correct appli- 
cation of all these principles is that we can form an estimate 
of the total value of all the wealth of the country which shall 
be quite independent of the particular rights of property in 
that wealth. 

8. Illustration of the Difference detween Wealth and Prop- 
erty. The importance of keeping in mind the nature of 
wealth, irrespective of the rights of property in it, will be made 
clear by an illustration. In the year 1837 a commercial crisis 
unparalleled in its intensity swept over this country : failures 
in business were seen on all sides ; those who did not fail had 
the greatest difficulty in making good their debts; workmen 
were thrown out of employment, and a large majority of the 
people felt that they had suddenly become poor. In ordinary 
language, their wealth was swept away as by a hurricane, and 
in all descriptions of the crisis it was alluded to as a destroyer 
of wealth. 

And yet if we look at the case from a common-sense point 
of view we shall see that no wealth at all was destroyed. 
There were just as many suits of clothes in the country the day. 
after the crisis as there were before, and they were just as well 
fitted for wearing. The mills and factories were all in as good 
order, the farms as fertile, and the crops as large before the 
supposed hurricane as after. The houses remained standing, 
the wood was in the woodsheds ready for burning, and the 
food in the larder ready for cooking, just as it had been left. 
In a word, every appliance for the continued enjoyment of the 
fruits of labor remained as perfect as it ever was. It is true 
that many found it difficult to purchase the necessary food and 
clothing although it existed in the granary and shops. But 



II. 11.] OF WEALTH AND ITS ASSOCIATED CONCEPTS. 55 

this is simply saying that there was a difficulty in arranging 
the terms and conditions of sales between the owners of the 
food and clothing and the people who wanted them. What 
the change in the state of things really consisted in cannot be 
explained until we have reached a more advanced stage of the 
subject, but it is perfectly clear at this stage that it did not 
consist of any destruction of wealth. 

9. Transfer of Ownership. In most cases the ownership 
of property can be transferred by some simple process from 
one person to another. This transfer consists in one person 
taking the place of another in that right to the wealth which 
is called ownership. It is made in various ways. In the famil- 
iar case of sale of personal property, the first owner, called the 
seller, places the property in the possession of the second one, 
called the purchaser. In case where the purchaser cannot con- 
veniently take possession of the property it is transferred by 
an instrument in writing known under various names : a deed 
or conveyance when the property transferred is real estate ; a 
bill of sale when it is personal property ; a cheque or bill of 
exchange when it is credit. 

10. Commodity. The term commodity, in economics, 
means any special kind or collection of wealth. It is usually 
confined to goods for sale in the public markets, such as cloth- 
ing and food, and in general to particular portions of wealth 
considered in their relation to any one who wants to possess 
and enjoy them. 

11. Capital. Capital is a kind of wealth. That is, all 
capital is wealth, but not all wealth is capital. But what kinds 
of wealth shall be considered capital and what not is a ques- 
tion which cannot be fully understood until after a thorough 
study of the subject. It will suffice at present to say that capi- 
tal consists of all that wealth which the owner is keeping, not 
for its own sake, but in order that he may by its means make 



56 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 11. 

it the instrument of acquiring further wealth. For example, 
tools are not kept because they satisfy any desire of the owner, 
but because they can be used in making things which do fulfil 
this object. Hence they are capital. The term also includes 
machinery, buildings designed for manufacturing purposes, 
and the raw material which is stored away in order to be 
manufactured into articles of utility. But the clothes we wear, 
the food we have stored in our houses for eating, and the beds 
on which we sleep are not capital, because they are kept in 
order to be immediately useful. 

To the beginner it will not be evident why this distinction 
should be made between wealth which is and wealth which is 
not capital, but we shall see later that it is of fundamental im- 
portance in questions involving the interests of society. 

Note on the Definition of tlie Word Property. This word is used in the 
present chapter in its popular rather than in its strictly legal sense. In the 
latter sense such words as " property," "estate," and "farm " do not mean 
tilings, but rights. An estate is not fields and buildings, but the right to own- 
ership in fields, buildings, or other wealth. A. farm does not mean a culti- 
vated piece of ground, but the right to cultivate the ground and dispose of the 
crops. So property is not wealth, but the exclusive right to the possession 
of wealth. Whether it would conduce to clear thinking in economics to 
confine such words to their purely legal sense is a question well worthy of 
consideration. Mr. Henry Dunning McLeod in his Elements of Economics 
insists very strongly on the legal meaning of these words, and considers it 
a positive error to apply them to things. It is certain that in the case in 
question the general and popular meaning of the words referred to is wealth, 
considered not in itself, but in relation to its owner. Since this relation 
necessarily implies the right of the owner to it, the two ideas of right and 
thing in which the right inheres are inseparable. It does not therefore seem 
that any confusion will arise from the double sense in which the word is 
used. AVhen one transfers property, it amounts to the same thing whether 
we say that what he transfers is the right or the thing. On the other hand, 
the restriction put upon the definition by Mr. McLeod has led him to con- 
clude that wealth may comprise "abstract rights, quite separate and sev- 
ered from any material substances," which does not sufficiently distinguish 
the risiht from the thing. 



II. 13.] OTHER DEFINITIONS. 57 



CHAPTER II. 

OTHER DEFINITIONS. 

12. Production. The act or process of applying labor in 
such a way as to bring wealth into existence is called produc- 
tion. 

As commonly used this word applies only to changes in the 
raw material of which an article is composed. If we watch 
the process through which a lump of iron ore is changed into a 
keg of nails, we shall find the material smelted, hammered, put 
into a car, conveyed to a city, and passed through a machine. 
All these operations are included under the term 'production. 
It is true that transportation from one place to another is not, 
in familiar language, called production, but it must be so called 
in scientific nomenclature, because in order to enjoy an article 
it must be brought within our reach, and the act of so bring- 
ing it belongs to the same class with that of making it. 

13. Exchange. In the most general sense of the term 
exchange consists in a mutual transfer of the ownership of 
two properties. A transfers to B his (A's) right of property in 
some commodity in consideration of B's transfer to him of 
some other and equivalent right. 

The necessity of exchange arises from the circumstance that 
no one person can produce more than a minute fraction of the 
wealth which he desires to enjoy. When, as in the savage 
state, each individual or each family supplies its own wants, 
there can be no considerable enjoyment of wealth. If each 
man among us should attempt to make boots, clothing, and 
hats, to build houses, to paint and plaster them, and to furnish 
them with everything necessary for comfort, he would miser- 
ably fail. But when, as in civilized society, each person de- 



58 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 13. 

votes himself to the production of a particular kind of wealth, 
the sum total of wealth produced is incalculably greater than 
when each person tries to make everything. Now in order 
that this increased production of each kind of commodity may 
be enjoyed by others than its immediate producer, there must 
be a transfer of ownership from the producer to the persons 
who are to enjoy the commodity. Hence arises a system of 
mutual exchange in which each receives a sujjposed equiva- 
lent for what he gives. 

Exchange is of two kinds, barter and sale. 

Barter is the exchange of one commodity for another, in 
the case when each party receives from the other some com- 
modity which he desires to make use of. For instance, if the 
owner of a yoke of oxen desires to exchange them for a horse, 
and finds a person who having a horse desires a yoke of oxen, 
the exchange of ownership would be barter. 

The necessity in barter that each party shall find another be- 
tween whom and himself there shall be a mutual desire for the 
exchange of commodities renders it impracticable on any con- 
siderable scale in a developed society. Occasionally we hear 
of a man bartering a horse for a carriage, or a farm for a city 
residence, but the transaction is too rare to be specially consid- 
ered in economics. 

In all societies advanced beyond the barbarous state exchange 
is affected by the use of a metal to which the term money is 
applied. The exchange of a commodity for money is called 
sale in relation to the one party and purchase in relation 
to the other. To illustrate the great advantage of sale over 
barter, let us suppose that the maker of a pair of boots desires 
to exchange them for a hat. It would be necessary for him to 
search diligently for some one person who wanted a pair of 
boots and who had a spare hat to exchange for them. Perhaps 
he could find no such person. He might find a number of 
owners of spare hats and a number of seekers of boots, but 
unless the two desires to part with the hat and to receive a 
pair of boots were merged in one person his search would be 



II. 14] OTHER DEFINITIONS. 59 

useless. But by the use of money it is only necessary that he 
should first find some one who desires his boots and then some 
one else who has a spare hat, and by sale in the one case and 
purchase in the other the desired exchange is effected. For 
this reason money is often called the mediiiHi of ex- 
change. 

14. Consumption. It is a universal characteristic of wealth 
that it is gradually used up or consumed in the very act of grati- 
fying the desires of its owners. The gradual wearing out of a 
coat and its consequent reduction to the state of rags is typical 
of this process in its ultimate form. The length of time occu- 
pied by wealth in the processes of consumption is, however, 
very different with different kinds of wealth. The words and 
gestures of the actor are consumed at the moment, and die in 
the very act of pleasing his audience. The faculties and skill 
of men die away in old age and entirely disappear at death. 
Clothing is consumed in a few months or years according to 
circumstances. In the case of houses a continual process of 
consumption is going on through the decay and disintegration 
of material produced by time and the weather. But for many 
years and even centuries this consumption may be neutralized 
by new acts of production in the form of repairs to the house. 
Ships and machinery wear out in the course of a few years. A 
canal so far as we know may be preserved through indefinite 
periods with the aid of occasional repairs. "Without this it will 
in the course of time be effaced through the operations of 
nature. This wearing out of wealth is called consumption. 

Productive and Unproductive Consumption. In the case 
of houses, furniture, clothing, food, and other articles the com- 
modity is gradually consumed in the very act of gratifying the 
consumer, and eventually disappears as wealth. The house 
after decaying, the coat after being worn out, and the food 
after being eaten no longer have the properties of house, 
clothing, or food. This process of losing useful properties 
is called unproductive consumption. But in the process of 



60 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 14. 

manufacture wealth is continually being consumed for the pur- 
pose of reappearing in a new and more useful form. For 
example, the wool of the sheep disappears as wool when it 
is woven into cloth. The cloth can no longer be used or sold 
as cloth after it is made into a coat. We conceive in these 
cases that the wool and cloth are really consumed to reappear 
in the improved forms of cloth and a coat respectively. This 
disappearance to reappear in a new form is called productive 
consumption. 

The question may be asked, Since the material of the wool 
remains through the whole process, and actually exists in the 
coat, why talk of consumption at all ? We answer this ques- 
tion by viewing the case in other aspects. Consumption does 
not consist in the annihilation of matter, for if it did there 
would be no consumption at all. The ultimate molecules of 
matter do not admit of change or decay. Consumption con- 
sists only in a change of the form and relations of the mole- 
cules. Nearly all the cotton that went into your shirt is still 
there after the shirt is a pile of rags in the paper-mill. In no 
case, therefore, is consumption anything but a change in the 
form of matter. We therefore say, in economics, that any 
particular kind of material is consumed when its form is so 
changed that it loses its original properties or qualities. ISTow, 
after the wool is made into cloth it has lost the property of 
being conveniently carded and spun and is no longer available 
for many purposes to which it could originally have been put. 
It is therefore consumed. So, also, the cloth after being made 
into a coat is good for nothing except as a coat ; it can no longer 
be used as blanket or made into a pair of pantaloons. We 
therefore say that it is consumed. But because in the act of 
consumption a more useful form of wealth has been produced 
we call the consumption productive. 

In order that consumption may be productive it is not nec- 
essary that the identical wealth consumed should be repro- 
duced in the new form. The consumption of oats and hay by 
a horse may be productive. The new form of oats and hay 



II. 15.] OTHER DEFINITIONS. 61 

will bo whatever wealth the horse may be enabled to produce. 
If he takes wheat to the mill to be ground, the food he has 
eaten may be considered as reappearing in the form of flour. 
The consumption of the iron and brass which enter into the 
machinery of a cotton-mill results in the formation of cloth, and 
not in any new form of the metals which went into the ma- 
chinery. 

The distinction between the two kinds of consumption may 
be condensed as follows : "Wealth being necessarily consumed 
in the process of satisfying the wants of man, we say : 

If the owner of wealth is consuming it, or allowing it to be 
consumed, not for his own immediate satisfaction, but in order 
that he may sell the result of the consumption to others, then 
the consumption is productive. 

But if he is consuming it for his own satisfaction or that of 
his family or friends, the consumption is unproductive. 

15. We perceive that the object and result of the opera- 
tions we have described is that men may enjoy wealth. These 
various operations may be divided into three classes — -produc- 
tion, transportation, and exchange. The first consists in me- 
chanical operations upon the sheep, the wool, the yarn, and the 
cloth, which operations were performed by labor with the aid 
of capital, and are called tending, shearing, combing, spinning, 
weaving, cutting, making up, etc. Since each of these opera- 
tions adds to the value of the product, they are all productive. 

The earlier economists were divided over the question 
whether transportation should also be included in the same 
class as production. It is, however, obvious that the transpor- 
tation was just as necessary a condition of the coat being worn 
as anything else ; it should therefore also be considered as pro- 
duction. But exchange has always been considered separate 
from production. Yet so far as the mere operation is concerned, 
the process of exchange is just as necessary to our having the 
coat as any other process was. It involved a certain amount of 
labor, namely, the labor of building a warehouse to hold the 



62 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 16. 

cloth or the coat until we should want it, and the labor of tak- 
ing care of it during this interval, as well as that of doing it up 
in proper shape and receiving the money paid for it. It is 
convenient to have a separate term for this necessary labor in- 
volved in the mere operation of exchange. We shall therefore 
call it friction of exchange. 

The operation of exchange, however, involves something 
more than the mere performance of labor, namely, the use of 
money and credit. Money and credit may be considered as 
forming a certain mechanism by which exchange is effected ; 
they have therefore been treated under the head of the me- 
chanism of exchange. This mechanism involves other forces 
than friction. Being one of the essentials to our enjoying the 
coat, it is an element in the social organism of the same impor- 
tance with capital and labor. 

1.6. Value. We can readily understand that under a sys- 
tem of barter the question would continually arise how much 
of one commodity should be given in exchange for another. If 
a man with a pair of boots to barter found one person offering 
him a hat in exchange, a second a coat, and a third a barrel of 
flour, he would have no ready means of deciding which offer 
was the best, or whether any of them would be advantageous. 
But when a commodity is sold, the owner receives a definite 
amount of money in exchange for it, and the best sale is that for 
most money. In effecting the sale he has before him a definite 
object, namely, to get as much money in exchange as he can.» 
The buyer has before him another definite object — to get the 
commodity as cheaply as he can. Thus, in each case, a certain 
order of choice is presented, the highest amount of money in 
the case of the seller, and the largest amount of goods in the 
case of the buyer, being preferred. From this order of prefer- 
ence arises the conception of a mathematical quantity called 
value. 

It is a general rule, applicable not only to economics, but to 
all the mathematical sciences, that the definition of an object 



II. 17.] OTHER DEFINITIONS. 63 

or of a magnitude of any kind does not include a description 
of how it shall be measured. As a general rule the quantity 
itself and the system of measuring it are to be defined sepa- 
rately. Now what is termed the theory of value includes not 
only these two definitions, but at least a third subject. We 
thus have, 

First, the definition of value as a simple quality or object, 
without respect to how it shall be measured. That is, we must 
know what value is. 

Secondly, we have to describe or define how value shall he 
measured. 

Thirdly, we have to study all the causes on which value de- 
pends. 

The last does not belong to the present stage of the subject, 
and the first can be better considered at a future stage. We 
have therefore only to deal with the second by considering 
how value is measured in practice. 

17. Value as a Mathematical Quantity. In economics 
price is considered as the measure of value. The price of a com- 
modity is the number of units of money which the commodity 
can be exchanged for in the public market. The monetary 
unit is a dollar in America, a pound in England, a franc in 
France, a mark in Germany, etc. 

We are careful to say, not that price is value, but that price 
is the measure of value. It is the measure of value just as 
length is the measure of a line, weight the measure of iron in 
the market, and volume the measure of things which sell by 
the bushel. We have now to consider the method of measure- 
ment. 

I. In mathematics quantity of any kind is measured by 
taking a certain standard portion of the quantity as a unit and 
determining to how many of these units the quantity measured 
is equivalent. For instance, the length of a board may be ex- 
pressed by taking a standard unit called the foot, and stating 
how many feet will make a length equal to the board. 



64 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 17. 

II. When we measure a quantity we leave out of considera- 
tion all the qualities of the thing measured except those which 
pertain to the special quality which is measured. For exam- 
ple, in estimating length the measuring unit may be made of 
iron, boxwood, brass, or any other material. The tiling 
measured may be wood, iron, rope, or any other substance ; 
may be of any color and have any weight. But all such quali- 
ties as color, weight, etc., are left out of consideration in the 
estimate of length. So with weight. Our unit of weight, 
which may be a pound or a kilogram, may be of any mate- 
rial whatever ; and the thing weighed may be of an}' length, 
any color, or any substance. But in stating the weight we 
make abstraction of all qualities except weight. 

So with value. In stating the value of a commodity we 
have no reference to its color, magnitude, or weight, but only 
to the degree in which it possesses the attribute of command- 
ing money in the public market. Just as we have a certain 
measure called a foot which we take as the unit of length, or 
a certain weight called a pound as a unit of weight, so we have 
a piece of gold which we call a dollar, the value of which we 
take as the unit of value. Again, as we measure length by 
applying a foot-rule, and weight by balancing two things in 
the scales, so we measure any commodity in terms of the unit 
of value by ascertaining how many units of value it will ex- 
change for in the public market. 

Relativity of Value. It follows from this that, like all 
other expressions of quantity, values are not absolute, but rela- 
tive to some unit of value. If we are asked for the value of 
a loaf of bread, we can answer only by saying that it is equal 
to a certain number of cents. The value of one cent is then 
the term of comparison or the unit of measure. If we express 
the value of a house in dollars, the dollar is the term of com- 
parison or unit of value. 

Absolute Value. It does not follow from this that there is 
no such thing as absolute value, but only that we have no way 
of stating what the absolute value of anything is. Here again 



II. 17.] OTHER DEFINITIONS. 65 

our conceptions will be assisted by an analogy with sensible 
objects. "We have here a piece of rope. It has a certain 
length. I may inform you what that length is by telling you 
that it is 2 yards, 6 feet, or 180 centimetres. Then the yard, 
the foot, or the centimetre is the term of comparison. Yet 
when I think abont the rope, I conceive its length as remain- 
ing the same no matter which term of comparison we use. So 
with value. The value of a barrel of flour to a certain person 
under given conditions is the same, though we may call it one 
pound, five dollars, twenty marks, or twenty-five francs. 

Effect of Changing the Unit of Measure. This principle 
has an important application. The number which expresses 
value, that is, the price, depends upon the unit of comparison, 
and in fact varies inversely as that unit varies. For example : 
A barrel of flour is worth four times as many marks as dol- 
lars, because the mark is only worth one fourth as much as 
the dollar. Now if all the foot-measures of the country were 
liable to change, either by an act of Congress or by a natural 
shrinkage or expansion over which men had no control, it is 
evident that the expression for all lengths would vary inversely 
as the measures. If the yard-stick were reduced to one half, 
a piece of cloth, unchanged in absolute length, would measure 
twice as many yards. So, in the case of value, we are com- 
pelled to admit that our measuring unit, the dollar, is subject 
"to changes like changes of length in a yard-stick. The prices 
of commodities will then change in the inverse ratio. But we 
are not therefore to look upon their absolute values as being 
altered by this cause, though their value relatively to the dol- 
lar is altered. The consideration of these changes belongs to 
a later part of the subject ; what we have at present to do is to 
fix in the mind the measure of value as a mathematical quan- 
tity, namely : 

The value of a commodity is expressed by the number of 
monetary units it will exchange for in the public market. 



5 



66 DESCRIPTION OF TEE SOCIAL ORGANISM. 



NOTES AND EXERCISES. 

1. The business forms and evidences of credit belong rather to the subject 
of business and finance than to that of economics; but as a knowledge of 
them is essential to the study of the latter science, the following explana- 
tions may be of use to the student. 

We call to mind that credit, as already explained, means the right on the 
part of the creditor to require a payment of money at some future time, 
and of course implies a corresponding obligation on the part of the debtor. 
The written or printed instruments by which such obligations are certified 
are classified in various ways, depending upon the class of persons to 
which the creditor belongs, and upon the nature of his obligation. 

The legal obligation on the part of an individual or a firm to make a 
payment is certified by a promissory note. Such a note is commonly ex- 
pressed in the following form: 

New York, December 1, 1885. 

Six months after date I promise to pay to John Smith or order the sum of 
$700, toith interest from date, for value received. 

William S. Bartlett. 

The expression "for value received" is necessary because payment can- 
not be enforced at law unless the promise was made in consideration of 
some act performed by the other party. 

The term "or order" indicates that the drawee or creditor (Smith) may 
transfer his right, by indorsement on the note, to any other person, this 
person to another, and so on indefinitely. The transfer is effected by each 
holder writing on the back of the note an order to pay some other holder 
and signing it, which order is called an indorsement. 

When the debt is due from an incorporated company or a government, 
the evidence of obligation is called a bond. The principal difference be- 
tween bonds and promissory notes consists in the persons who issue 
them, and in the fact that in a bond is commonly given a statement of the 
laws or other authority under which it is issued. Sometimes, as in the case 
of United States bonds, the principal of the debt is payable at a future defi- 
nite time, with interest payable semi-annually. In the case of bonds issued 
by most European governments, the time of payment of the principal is so 
far from being definitely fixed that the value of the bonds depends mainly 
upon the rate of interest, and the obligation is that of paying a certain sum 
annually for an undefined period of time. 

Next to government bonds, railway bonds have become the most common 
in recent times. When a railway is to be built, the stockholders generally 
borrow a considerable part of the money necessary for the work. The 
bonds in which the obligation to pay principal and interest of the money is 
certified are called railway bonds. 



EXERCISES. 67 

Mortgages. The conditional right to property pledged in payment of a 
debt, which has been described in § 7, is called a mortgage. Railway 
bonds are always secured by a mortgage upon the property held by the 
railway company. Then, in case the company fails to make good its obli- 
gations, the bond-holders have the right to take possession of all the prop- 
erty owned by the railway company, and to apply it in paying their bonds 
or otherwise securing their rights. The familiar case of a mortgage of real 
or personal property by an individual may also be mentioned, but need 
not be discussed. 

2. Mr. H. D. MacLeod divides wealth into three classes, as follows : 

I. "Material or corporeal things. There are material things, such as 
lands, houses, money, corn, timber, cattle and herds of all sorts, jewelry, 
minerals, and innumerable things of this nature which can be bought and 
sold, and whose value is measured in money. 

II. ' ' Immaterial wealth. A person may sell his labor or services in many 
capacities for money, such as a ploughman, an artisan, a carpenter, or as a 
physician, an advocate, an engineer, an actor, or a soldier; and when he 
receives a definite sum of money for such labor or service, its value is 
measured in money, as precisely as if it were a material chattel. 

"We have already cited, in a previous chapter, the dialogue called the 
Eryxias, to show that labor of any sort which is paid for is wealth, for the 
very same reason that gold and silver are wealth. 

III. ' ' Incorporeal wealth. There are vast masses of property which exist 
only in the form of abstract rights, quite separate and severed from any 
material substances, which can all be bought and sold, and whose value 
can be measured in money, exactly like that of any material chattel." 

Is the above classification satisfactory? In the second class can labor 
be properly considered as wealth? Must not something, if it be no more 
material or durable than musical sounds, be produced by the labor? If so, 
in what does the wealth inhere? Is labor, apart from a result, ever paid for? 

In respect to the third class, can any abstract rights have market value 
unless they are rights to or in some object, now existing or hereafter to 
exist, material or immaterial? Consider in succession the case of govern- 
ment bonds, railway stocks and bonds, bank stocks, promissory notes, and 
tickets to a theatre. Can you, in all these cases, form distinct conceptions 
of the right, and of the object in which it inheres? If so, you are to con- 
sider the latter, whatever it may be, as the wealth, and the former as 
nothing more than the right to the wealth. 

3. To what extent, if at all, do you think any of the following things 
should be considered wealth? Give your reasons in each case, but remem- 
ber at the same time that since we are concerned only with definitions, and 
since definitions, in the last analysis, are arbitrary, we are to consider only 
the question whether it is convenient and conducive to clear thinking to 
consider the things as wealth. 



68 DESCRIPTION OF THE SOCIAL ORGANISM. 

I. The acquired skill of the artisan. 
II. A strong and active population. 

III. The moral qualities of the people. 

IV. The sounds produced by a musician. 

V. The Washington monument at Washington. 
VI. A good business reputation. 

4. What persons can be said to enjoy or use the Washington monument? 

5. A farmer owns a farm valued at $10,000. A railway company «of 
which the stock is divided into 50,000 shares has a mortgage of $6000 on 
the farm. If the company consists of 1000 shareholders, each holding 50 
shares of the stock, how is the property in the farm divided amongst the 
various parties concerned? 

6. The net earnings of a railway having 10,000 shares of stock are such 
as to justify a gross valuation of $2,000,000. It has out, however, 1500 
mortgage bonds of $1000 each. What will be the value of the following 
properties in the railway and its bonds held by the following three per- 
sons? 

A. A person holding 50 shares of the stock. 

B. A person holding 60 shares of the stock and 5 of the bonds. 

C. A person holding 10 shares of the stock and 20 of the bonds. 

7. If the inhabitants of a city should borrow a sum of $5000 and expend 
it in improving their streets, in what respect would the amount of public 
and private property of the city and its inhabitants be changed after the 
improvement was made? Consider separately the cases when the money 
is borrowed from persons outside the city and when the citizens themselves 
loan the money. 

8. A farmer borrows $1000 from his neighbor, and expends it in barns 
and other improvements on his farm. In what respect has the wealth 
owned by the farmer and his neighbor respectively been changed? Has 
the total value possessed by either been changed? 

9. If all the members of a community should lose all their money, but 
still have an ample supply of all the necessaries and luxuries of life stored 
up in their warehouses, would they be completely impoverished by the 
loss of their money? In what way would you expect them to proceed in 
order to make use of their wealth? 

10. If, in levying a tax, every holder of a promissory note secured by 
mortgage of farms is taxed upon the whole amount of the note, while the 
owners of the farms are taxed for the full value of the farms, is there any 
inequality or injustice in the tax? 

11. When we say of a rich man "he has plenty of money," or " he owns 
a million of dollars," do we make a correct use of language? Do you con- 
ceive that there is any person in the country who now owns, or ever did 



EXERCISES. 69 

own, a million of dollars in either gold or silver? Define precisely what it 
is we mean when we speak of a rich man as owning money. 

12. Can any person but the owner of a' private collection of pictures 
enjoy the use of the pictures? Can he enjoy them equally with the owner? 

13. When a hospitable man gives an expensive dinner - party to his 
friends, describe the compensation which he receives for the expenditure 
of his money. 

II. From an economic point of view, what does the contributor to a 
charitable society receive in exchange for his gifts? 

15. Do you consider that in either of the last two cases there are any 
sound reasons for making a distinction between the enjoyment received for 
the expenditure and the enjoyment received when one purchases goods in 
the market? 

16. Do you consider that the country at large is richer or poorer when, 
in consequence of a scarcity in the wheat-crop, the price of wheat rises in 
a yet greater proportion, so that the crop is worth more than before? 

17. Suppose Congress should call in all the silver and gold of the country 
and re-coin it, putting just half as much metal in the coin as before, so that 
twice as many dollars would be in circulation, but each dollar would only 
have half as much metal. Can you judge what effect this measure would 
have upon price? Do you conceive that values would be affected by it? 
If so, how, or in what sense? 

18. When one buys a ticket to the theatre, what is to be regarded as the 
wealth he is paying for? 

19. During the few years after .the gold discoveries in California and 
Australia, prices generally were higher the world over. Did this indicate 
a change in real values, and, if so, in the value of what? 

20. When we speak of the value of a good name, do we use the word 
"value" in an economic sense? Supposing it to be interpreted in an 
economic sense, how would you measure it? 

21. Are the following cases of consumption productive or unproductive? 
I. The consumption of wheat to produce flour. 

II. The consumption of flour to make bread. 

III. The consumption of bread to support life. 

IV. The burning of coal in an engine. 

V. The burning of coal to warm a house. 
YI. The burning of coal to warm a factory. 

22. What would the economist mean by the consumption of horses and 
cattle? In what cases is the consumption productive, and in what cases 
unproductive? 

23. What different kinds of wealth have to be consumed in the produc- 
tion of wheat? In that of wealth? 



70 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 18. 



Division B.— The Mechanism of Production. 



CHAPTER III. 

THE REQUISITES OF PRODUCTION. 

18. To see what we mean by the requisites of production, 
let us return to our starting-point. We see in man a being 
moved to action by innumerable wants. The satisfaction of 
these wants constitutes his well-being, and the exertions which 
he makes to attain this well-being are called his labor. The pro- 
cess of employing his labor so as to produce the greatest well- 
being requires certain agencies which are included under the 
term wealth. The operation of bringing wealth into existence 
and making it available for well-being is called production. 
Now if men could at any moment produce all the wealth they 
wanted without regard to conditions, the state of the world 
would be entirely different from what it is. As a matter of 
fact, the successful production of wealth requires the employ- 
ment of objects and agencies of various kinds. Any object or 
agency which conduces to production is called a requisite of 
production. To illustrate the requisites of production, let us see 
what had to be done in order that a coat should be made for a 
man to wear. 

In the first place, sheep had to be reared, pastured, and sheared 
in order that the wool necessary for the coat should be ob- 
tained. The breeding of the sheep required a considerable 
expanse of land on some western prairie or in the interior of 
Australia. It is obvious that without land there could be no 
grass and therefore no wool. ISTow land is in its original state a 
gift of nature which men cannot make at all. In the further pro- 



11.18.] TEE REQUISITES OF PRODUCTION. 71 

cess of manufacture a factory had to be erected and machinery 
of brass and iron employed. A particular kind of earth was 
necessary to make the bricks out of which the factory was 
built, and the iron had to be extracted from iron ore. Both 
these materials had to be taken out of the earth, and their own- 
ership is associated with that of land. If the machinery was 
run by water-power, a river was necessary ; if by steam-power, 
coal had to be dug from the earth to make the fires which pro- 
duced the steam. 

If we take up any other article of wealth and inquire how it 
was made, we shall find that we start in the same way with 
natural products, such as soil, metallic ores, beds of coal, rivers 
and oceans. These products are at the basis of production, 
and the most important of them are found under or in the 
ground. We therefore have the two following propositions : 
I. Natural products are the first requisites of production. 

II. The principal natural products which are material in 
form are found under or are derived from the soil. 

Another requisite to the coat is capital, of which the material 
and machinery may be considered typical. They are appliances 
which have no use in themselves, but without which the coat 
cannot be made. • Capital is therefore another requisite of pro- 
duction. 

Yet another requisite is labor. Everybody sees that a coat 
cannot be made unless the drovers, shearers, railway employes, 
operators, dealers, and merchants all perform certain functions; 
and such performance we call labor. 

But there is yet another condition which may be to a certain 
extent included under labor and skill, but which nevertheless 
has a basis distinct from either. This something is organiza- 
tion. It probably took many hundred men to make the coat. 
Only one man out of all these knew who the coat was for, and 
he did not know it until the owner went to buy it or to order 
it. All these hundred men must work in unison, and must 
acquire certain habits and customs in order to do their work to 
the best advantage. The men who direct them, especially those 



72 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 19. 

who bought and sold the goods, required long experience to 
know just whither the wool and the cloth should be taken, and 
to whom they should be sold, in order that the wearer might get 
his coat in the most economical way. These habits, this knowl- 
edge, and this business skill are things of slow growth from 
generation to generation, and being necessary to the coat should 
be considered requisites of production. 

19. Of Knowledge as a Requisite of Production. Pro- 
ceeding with our inquiry, we see that another requisite equally 
necessary, though often forgotten, is knowledge. In knowl- 
edge we may include skill of any kind. 

If men do not know how to cultivate the ground, to shear 
sheep, to spin and weave economically, and to manage all the 
complicated machinery necessary in applying the powers of 
nature, there could be no coat made, or at least only a very 
inferior and costly article. Knowledge is therefore an indis- 
pensable requisite, and one for which large sums of money may 
be paid. The owners of a silver-mine will readily give thou- 
sands of dollars to an expert geologist merely to be informed of 
the probable amount and situation of the ore which may be 
contained within their property. What they pay for in this 
case is nothing but knowledge, since the geologist they employ 
is not expected to do anything but give them information. 
Knowledge is a product of labor, since, omitting exceptional 
cases, no one can acquire it without that exertion of the facul- 
ties called labor. The acquisition of knowledge may therefore 
be regarded as an act of production. But there are two es- 
sential points in which the acquisition of knowledge differs from 
other kinds of production. 

I. Diffusibility of Knowledge. In general when wealth is 
produced it can be transferred only to a limited number of per- 
sons. What one person gets another cannot have. But valu- 
able knowledge may, by speaking, writing, or printing, be rapid- 
ly diffused over the whole world. The producer of knowledge 
may indeed keep it to himself and seek to derive the whole 



11.20.] KNOWLEDGE A REQUISITE OF PRODUCTION. 73 

benefit of it. But as a general rule little benefit will be ac- 
quired unless lie transmits the knowledge to others. Among 
men professionally engaged in the increase of knowledge it is 
generally a matter of honor to make known to the world every- 
thing that they discover. 

II. Tentative Character of the Labor of acquiring Knowl- 
edge. The second point in which the acquisition of knowledge 
differs from other kinds of production is that the acquirer neces- 
sarily works in the dark to a greater or less extent. As a general 
rule the person who is engaged in production knows exactly 
what he is going to produce, and can estimate in advance with 
more or less accuracy the amount of labor which he must ex- 
pend to attain a given end. But in the pursuit of knowledge 
the very fact that the investigator is intent on discovering 
something not before known implies a greater or less degree of 
ignorance as to what he is going to learn. In consequence 
there will sometimes, though not always, be doubt whether he 
is going to learn anything of value. Searching after knowl- 
edge is generally like seeking to discover whether a country 
does or does not abound in mineral wealth. Labor must be 
spent in investigation, and until the work is done it must be 
doubtful whether any discovery of value will be made. 

20. Classification of Knowledge. To understand the rela- 
tions of the different classes of knowledge to the prosperity of 
mankind we must examine more in detail the different kinds of 
knowledge. We frequently hear the term " useful knowledge" 
employed. The use of this term implies the antithetical idea 
of useless knowledge. From a purely economic point of view 
this distinction has a certain foundation. Some kinds of knowl- 
edge have been applied so as to increase the production of 
wealth, while other kinds have not. The former may be called 
useful, and the latter, so far as the production of wealth is con- 
cerned, may be called useless. It is therefore very common, 
especially among men of narrow views, to ask what is the use 
of scientific investigation or of any kind of learning which does 



74 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 20. 

not evidently conduce to the production of wealth. The reply 
to this is that it is impossible to decide whether a result of 
investigation is or is not useless until it is fully mastered and 
understood. Even then years or generations may elapse before 
we can ascertain how it is to be applied in promoting the 
good of mankind. As a matter of fact, it is rarely found that 
investigations made with an immediate utilitarian object in 
view lead to any result which is of extended utility. The gen- 
eral experience of mankind shows that, in order to attain re- 
sults of permanent value and capable of the widest applications, 
the ruling motive must be the mere desire of learning and not 
the acquisition of useful results. The explanation of this seem- 
ing paradox is found in the tentative character of the search 
after knowledge already described. We cannot know how a 
result is going to be useful until we have fully mastered it. 

A body of knowledge collected and arranged with respect to 
its intrinsic completeness, and without respect to its economi- 
cal applications, is called a science. The relation which we 
have described between science and the production of wealth 
may be illustrated by a glance at the history of electricity. 
When, two centuries ago, pliysical philosophers began to inves- 
tigate the attractions and repulsions which were noticed be- 
tween bodies after being rubbed together, it was impossible to 
foresee how these facts could be turned to any useful purpose. 
A hundred years later the experiments of Franklin were looked 
upon with comparative indifference by his neighbors. The 
same thing remained true when Galvani and Yolta began to 
experiment on the contraction of the muscles of a frog's leg 
produced when pieces of metal were brought into contact with 
it. Mathematicians devoted great labor to investigating the 
laws of the electric currents before any utilitarian application of 
the principles could be foreseen. Thus, out of pure curiosity 
and a desire for thoroughness of knowledge, a science was con- 
structed without any reference to utility. 

But as the science became perfected it was found susceptible 
of uses which its founders could never have dreamed of. First 



11.21.] KNOWLEDGE A REQUISITE OF PRODUCTION. 75 

came the electric telegraph, which has been gradually per- 
fected by the laws discovered by mathematicians. Then came 
the dynamo machine, by which a curious transformation of 
physical forces was perfected. Instead of getting light di- 
rectly from combustion we may now burn the coal, turn the 
heat thus generated into energy by an engine, turn this energy 
into electricity by a dynamo machine, and finally turn the 
electricity into heat of great intensity, and thus generate an 
amount of light exceeding many times over what could have 
been obtained from the original combustion of the coal. What 
we are to remember is that all the benefits now or hereafter to 
be obtained from electricity would never have been known had 
not several generations of philosophers, out of pure curiosity, 
devoted themselves to the investigation of the laws of that 
agent. The same thing is to a greater or less extent true of all 
the modern applications of scientific principles to production. 
The knowledge of these principles originates in investiga- 
tion undertaken from the desire of acquiring thorough and 
complete knowledge, and not with the object of reaching any 
evidently useful result. 

21. The knowledge just described is that of the laws of nat- 
ure. But after the laws of nature are discovered another class of 
investigation comes in. It is necessary to discover by measure- 
ment and observation the constant quantities which enter into 
the expressions of these laws. For example, it is a law of 
nature that heavy bodies are attracted towards the centre of 
the earth. The mere knowledge of this law does not tell us 
how strong the attraction is. But when we learn by experi- 
ment that a heavy body in a vacuum falls sixteen feet in one 
second, we have an exact quantity which it is necessary to 
know in order to apply our knowledge. The attractive forces 
of electricity under different circumstances, the boiling points 
of liquids, the pressure of gas and vapors at various tempera- 
tures and densities, the electric resistances of various materials, 
and the distances of the heavenly bodies, are examples of an 



76 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 21. 

indefinite number of physical constants which must be known 
in order that natural laws may be applied so as to secure the 
greatest results with the least expenditure of labor. 

Statistical and geographical knowledge, maps of the country, 
and tables of fertility of the soil may be considered as belong- 
in o- to the same class with the knowledge of the constants of 
nature. What distinguishes this class of knowledge is that it 
is not pursued in the dark as one has to pursue the discovery 
of new laws. In determining a chemical constant, making a 
map of a country, or analyzing a soil, one may know before- 
hand exactly what he has to do and what the general character 
of his result will be. 

It is an essential characteristic of all the knowledge just de- 
scribed that when once found it may be transmitted to man- 
kind in general. But there is something closely allied to 
knowledge which is not thus transferable. It may perhaps 
be called individual skill and power of judgment, rather than 
knowledge. The skill of the mechanic, the administrative 
abilities of the president of a railroad, and the business knowl- 
edge and skill of a merchant belong to this class. All are 
essential to the most efficient production. In nearly every 
branch of business a person possessed of the proper talents 
gradually acquires a sort of knowledge by which he in- 
stinctively avoids mistakes, forms correct judgments of what 
should be done under various circumstances, and thus acquires 
a wealth-producing power which inexperienced persons would 
not possess. If all the producers of the country should lose 
the special skill and faculties which they have acquired by 
experience, a severe blow would be struck at the production 
of wealth. 



11.22.] OF NATURAL AGENTS AS REQUISITES. 77 

CHAPTEK IV. 

OF NATURAL AGENTS AS REQUISITES OF PRODUCTION. 

22. We Lave seen that raw material and natural produc- 
tions are the first and most necessary requisites of production. 
Were these requisites obtainable by all the world in unlimited 
quantities, the state of society would be entirely different from 
what it is. But if we look around us we shall see that while 
the supply of some agents is substantially unlimited, that of 
others is either limited in quantity or accessibility. The supply 
of air is unlimited. The limitations upon the supply of water 
for household purposes are so few as to be hardly worth taking 
into account. But the case is very different with land and 
metalliferous ores. The farms are necessarily limited to the 
forty or fifty million of square miles comprising the surface of 
the continents and islands of the earth ; and if we take out those 
portions which are either uninhabited or useless, the actual 
available supply of land will be much smaller. Ores and min- 
erals are yet more limited in quantity. The streams which 
can furnish water-power are generally few in any one country. 
The result of this is that it is physically impossible for every 
one to command all of these requisites of production which he 
needs or may think he needs. 

In a primitive state of society we might imagine every man 
to be allowed to avail himself of his share of the raw material 
supplied by nature without money and without price. There 
are enthusiasts who advocate the trial of such a system at the 
present time. But a slight examination will show us that it 
would be contrary to the instincts of human nature which 
rule us in such cases, and would be impracticable of execution 
as things now exist. We have first to show by what instincts 
of human nature the right of property in an object supplied 
by nature is recognized. 



78 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 23. 

23. Of Appropriation. If we look back into history to 
learn how land, minerals, and other agents supplied by nature 
could be owned by individuals, we shall find it to be through 
the right of appropriation. There is a natural feeling in the 
breast of each man that if he discovers something which was 
not previously known, or at least was not valued or used by 
any one else, he has the right to claim it as his property, so far 
at least as he is able to take possession of it. This right, how- 
ever, speedily becomes limited and regulated by governments, 
which claim the right to make laws on the subject. The gen- 
eral rule is that if an island or any new land is discovered by a 
citizen of any country, the government of that country claims 
the right to ownership. Thus a large part of the American 
continent was at one time considered the property of one or 
another of the governments of Europe which had sent out ex- 
peditions for its discovery. Thus also England at various times 
became the owner of numerous islands which were discovered 
by her navigators in every part of the globe. In new coun- 
tries the land is considered the property of the government, 
which sells it to individuals. Thus in most of the British 
colonies there are large tracts of land, known as crown lands, 
not yet occupied by settlers, but which may be sold to them as 
they require it. So, also, the United States Government owns 
large tracts known as " public lands" in the western Territories, 
and derives an income of several million dollars per annum 
from their sale. When the land thus becomes the property of 
the individual, his right to dispose of it is, with some excep- 
tions, as absolute as his right to dispose of anything he has 
himself made. 

The government claims not only the land, but all the min- 
erals which may be concealed beneath it; an individual be- 
comes the owner of such wealth by first discovering that it 
exists. He goes out "prospecting" on some portion of the 
public lands where his geological knowledge may lead him 
to infer the existence of minerals, and if he thinks he has dis- 
covered ores of value he may purchase from the government 



11.24.] OF NATURAL AGENTS AS REQUISITES. 79 

the right to dig a mine and appropriate all the ores he finds 
to his own use. Nearly the same rule holds in the case of 
diamonds. When, for example, the great diamond-fields were 
discovered in South Africa, the exclusive right to gather them 
was granted to certain companies. Thus we perceive the 
operation of the fundamental principle already alluded to, that, 
by the instincts of our nature, the act of discovering and 
taking possession of land gives the right of ownership, subject 
to such limitations as the supreme power may enact. Now this 
system has both its abuses and its reasons. Let us consider first 
the reasons for it. 

24. Necessity of the Bight of Property in Natural Agents. 
If the condition of land and minerals were such that each indi- 
vidual could avail himself of them without labor, the case would 
be much stronger in favor of those who would restrict or deny 
the right of appropriation. But a little consideration will show 
that, as a matter of fact, it is impossible to make any arrange- 
ments for the possession of natural agents without devoting 
labor to them. Take first the case of land. Before a crop can 
be raised from it, trees must be cut down, fences built, barns 
and other structures erected, and fertilizers purchased and ap- 
plied to the fields. It is not worth while to make these im- 
provements unless the person who makes them is to have the 
benefit of them. But it is impossible to separate them from 
the land. He cannot carry away the house, the stables, the 
fences, or the fertilizers. Thus he cannot be deprived of his 
right in the land without interfering with his exclusive right 
to the product of his own labor. 

In the case of anything concealed beneath the soil, discovery 
is necessary before it can be utilized. Now the process of dis- 
covery is one which requires skill and may involve great labor 
and hardship. No one is going to subject himself to this hard- 
ship unless he is to reap the fruit of his discovery. Practi- 
cally, therefore, the right of appropriation in natural agents 
cannot be denied without denying the right of property in the 



80 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 24. 

product of one's own labor. Moreover, the right to find a mine 
or to preempt a farm is not confined to any particular persons 
or class of persons, but is equally enjoyed by every one who 
chooses to avail himself of his opportunities. Thus natural 
agents become private property by a logical necessity which 
mankind have in all ages been obliged to accept. 

Objections stated. It must be recognized that as the popu- 
lation of a region increases, notwithstanding the necessity just 
shown, the supply of natural agents becomes scarce. The 
general rule is that when land is first occupied, or any natural 
product discovered, its value is very slight. ~No limitation is 
placed upon the quantity which any one person may own, and 
thus there is nothing in the way of an individual possessing 
himself of entire counties and perhaps owning the whole of a 
valuable mine. Now if population did not increase there would 
be no objection to this. But it often happens that the land so 
little valued by one generation is of the greatest importance to 
subsequent generations who come into the world finding that 
their ancestors have permitted this valuable gift of nature to 
be inherited by a few individuals. Thus in England more than 
half the land is nominally owned by a comparatively small 
number of people. In every part of the world valuable mines 
of coal and of iron, the products of which are most necessary 
to the community at large, are held by a few individuals or com- 
panies, who can command a price for what was originally a gift 
of nature. Hence the view that this system is wrong, and that 
the right of every human being to his share of the gifts of 
nature should be recognized, is not an unreasonable one. 

But when we examine more closely we shall see that this 
evil is to a great extent compensated in various ways. We can 
at present only indicate the compensations in a general way, 
because the full treatment of the subject requires a knowledge 
of economical theories yet to be acquired. In the first place, 
we readily see that if every one were allowed at pleasure to 
avail himself of all the raw materials of nature, they would be 
speedily exhausted, so that none might be left for posterity. 



11.24.] OF NATURAL AGENTS AS REQUISITES. 81 

Hence it would be necessary to prescribe how much coal or 
iron or other minerals each individual should have. The 
practical difficulties in doing this would be insurmountable. 
But under our actual system the care which every prudent 
person takes of his own property is extended by the owners 
of natural agents to their property, and thus the contents of 
the great storehouses of nature are protected from waste. 

Again, self-interest prompts the owners to allow the public 
the benefit of their possessions on nearly as good terms as the 
public could command if the property were public. It is true, 
theoretically at least, that if the right of the land-owner is 
completely unrestricted he could fence in his land and forbid 
its being applied to any useful purpose. Practically, however, 
this cannot be done. Should it be attempted, we may be sure 
that society would find a way of remedying the matter. An 
example of how readily law is provided to meet a difficult case 
is afforded by the decisions affecting the rights and obligations 
of irrigating companies in the arid regions west of the Rocky 
Mountains, and especially on the Pacific coast. Here the very 
existence of the farming population depends upon a supply of 
water from mountain-streams which are in the possession of 
companies who have collected the water in reservoirs and con- 
structed the conduits and other appliances necessary to supply 
the farms. Suits by the farmers against the companies are not 
uncommon, and the general result has been a body of law which 
insures to every farmer his supply of water on the same terms 
that his neighbors get it, and as completely as if the works of 
the irrigating companies were public property. In England 
the rights of the landlord are far more restricted than in 
America. Neither law nor public opinion allows him to charge 
as much as he pleases for his land, as he may do with us. 

"When we are in doubt between opposing reasons we may 
often appeal with advantage to the instincts of human nature. 
The fact that men of all races are ready to fight for their land 
may decide the question for us. 



"82 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 25. 



CHAPTEE V. 

OF CAPITAL. 

25. The use and importance of capital arise from the fact 
that men cannot, by the direct application of their labor to the 
materials furnished by nature, produce those articles which they 
desire. For example, they cannot with their own hands make 
cotton into a shirt. They must have a loom to effect the trans- 
formation. The farmer cannot raise wheat without the aid of 
spades, ploughs, or machinery to till the ground ; and after his 
wheat is raised he needs a mill to grind it into flour^ In these 
cases the loom, the spade, the plough, and the mill are not de- 
sired for their own sake, but only because they are useful in 
producing objects of desire. If we continue this analysis we 
shall see that the wealth of the country may be divided into 
two portions : 

1. "Wealth which is desired and possessed by its owner for 
its own sake, because it contributes directly to the gratification 
of the owner. Examples of such wealth are the houses in 
which we live, the furniture, books, and pictures which adorn 
our walls, the clothes we wear, the food we eat, and the coal 
which is to keep us warm. This kind of wealth we shall call 
sustenance. 

2. Wealth which is desired, not for its own sake, but in order 
that by it we may obtain such wealth as we do desire for its own 
sake. Wealth desired, not for its own sake, but for the sake 
of the sustenance which it will enable us to produce is called 
capital. 

The distinction between capital and sustenance, though logi- 
cally a sharp one, cannot be sharply drawn in practice. We 
cannot always decide without question whether any given kind 
of wealth is or is not capital. We shall also have to recognize 



II. 25.] OF CAPITAL. 83 

the principle that wealth may possess the quality of capital in 
different degrees, and may be capital or not according to its re- 
lations to its owner. 

There is another definition of capital which at first sight may 
seem to have no relation to the one just given, but which, 
when we examine it more closely, we shall see to be equiva- 
lent as a consequence of human nature. It is as follows : 
Capital is that wealth from the enjoyment of which the own- 
ers are abstaining in order to gain a future profit. 

To show how these two definitions amount to the same thin a- 
let us take first the case of the savage who possesses no power 
of abstaining from present enjoyment for the sake of future 
good. He will not try to make any sort of machineiy, because 
before he can get any good from the machinery he will have to 
wait a long time, and he is not willing to spend his labor for 
any benefit to accrue only in the distant future. ' He would 
rather chase a buffalo and thus get a skin which he can put on 
to-morrow than undertake any labor which will not yield him 
good clothes until next year. If he has corn, he will pound it 
between two stones, because then he can enjoy the product of 
his labor the same day when he sits down to his evening meal. 
But he will not sow it to raise a crop for the next year. 

Coming next to civilized men, we find that large numbers of 
them, even among the well-to-do classes, rarely attempt to ac- 
quire wealth except for its own sake. They expend all their 
income on house -rent, furniture, coal, food, clothing, and 
other things desired for their own sake. Hence they never 
save. But if a person wants to save up money and gain inter- 
est on it, he must get something which he does not want for 
its own sake, but for the sake of something else to be obtained 
in the future. "We may therefore say that wealth from which 
the owner is abstaining for a future profit is identical with the 
wealth which is desired, not for its own sake, but in order by 
its means to obtain more wealth. 



84 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 27. 

26. Use of the Term Sustenance. We have spoken of 
wealth which is desired by the owner for its own sake, and is 
called sustenance. The most important wealth of this kind is 
the food and clothing which every man must have in order to 
live, and the house which shelters him from the weather. In 
the case of the laborer who saves nothing, this is the only kind 
of wealth which he works for or seeks to possess. 

It might at first sight appear proper to confine this term to 
the food, clothing, and shelter absolutely necessary to sustain 
the life, health, and physical vigor of the laborer. But it is 
well known that we cannot draw any sharp line between the 
necessaries and luxuries of life ; nor can we draw any such line 
between those who are laborers and those who are not. We 
must therefore include in the term sustenance not only what 
sustains life, but everything which a person requires or can 
command for the purpose of unproductive consumption by 
himself and his family. It includes pictures, furniture and 
books, and indeed everything which does not produce other 
wealth in the act of being consumed. 

27. Classification and Examples of Capital. Differences 
of opinion sometimes arise as to whether special kinds of 
wealth should or should not be considered capital. To recon- 
cile these differences, we must admit that capital is in part a 
relative term, depending not merely upon the wealth itself, 
but on its relation to its owner. If it is something which the 
owner is not keeping for its own sake, but from the enjoyment 
of which he is abstaining, then it is capital so far as he is con- 
cerned, though it may not be capital when considered in relation 
to the person who is enjoying it. A difficult question of this 
sort arises in connection with dwelling-houses. When a person 
lives in his own house, the house is not capital. He is not 
abstaining from the enjoyment which the house might afford, 
and he is keeping the house for its own sake ; hence it is not 
capital. But if he rents the house to some one else, then he is 
abstaining from the enjoyment of it; and he is not using it for 



II. 27.] OF CAPITAL. 85 

its own sake, but for the annual rent which he is receiving, or, 
more exactly, for the sake of the things which he may buy with 
the rent. Hence the house is capital in its relation to him. But 
it is not capital in relation to the community at large, for it is 
clear that houses are built for their own sake, and not to help 
future production. No more cloth is made and no more wheat 
brought to market after a house is built than before. 

This leads us to say that the quality of capital considered as 
a relative term may be algebraically negative as well as positive. 
Relative to the tenant who lives in the house, the house is 
negative capital, because he is enjoying more wealth than he 
owns. The idea of capital as a mathematical quantity may be 
reached by the following course of thought: 

Let us compare the wealth owned with the sustenance en- 
joyed by any person. If we subtract from the total wealth 
which he owns all that wealth which he employs as suste- 
nance, or is making use of for his own enjoyment, the remain- 
der will, by definition, be capital, because it is that portion of 
his wealth from the enjoyment of which he is abstaining. 

But it may happen that the individual is enjoying more 
sustenance than he owns. In this case the definition will re- 
quire us to subtract a greater quantity from a less, the result of 
which will be algebraically negative. This is the case with the 
improvident man. He has perhaps spent every cent he ever 
earned on objects of desire, and thus has not a dollar saved in 
the world ; yet he may be living in a house which cost ten thou- 
sand dollars. Then he not only never saved anything, but he is 
enjoying what somebody else, namely, the owner of the house, 
has saved. Thus he is an algeoraically negative capitalist. 

The question may arise whether by limiting capital to things 
not wanted for their own sake we do not find that after all 
scarcely anything will be left except capital. For example, 
the barrel of flour in my pantry, it may be said, is not wanted 
for its own sake, but for the sake of the bread which will be 
made from it. One may go even farther, and inquire whether 
the coal in my cellar is not wanted for the sake of the heat 



86 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 28. 

it is to furnish, and is not therefore capital. The reply to this 
is that we must give a special interpretation to the first defi- 
nition of capital. We regard wealth as wanted for its own 
sake whenever it has reached the hands of the owner who is 
keeping it for his own exclusive use and is not abstaining from 
it for the sake of the profit to be gained thereby. Hence when 
the barrel of flour reaches the family who are to use it it ceases 
to be capital, though it is capital in the store of the grocer, be- 
cause he keeps it to get something else with. And, in general, 
all the wealth of the country which is going through the pro- 
cesses of manufacture, sale, and transportation may be consid- 
ered capital. 

28. Fixed and Circulating Capital. Economists divide 
capital into fixed and circulating. Fixed capital comprises ma- 
chinery and public and private works which are employed as 
agencies in production. Ploughs, fences, and working animals 
on a farm ; factories and the machinery which they contain ; 
railways with all their rolling-stock ; ships and storehouses, 
are examples of fixed capital. 

Circulating capital consists of the money which is circulated 
from hand to hand in the channels of trade, the material under- 
going the process of manufacture, transportation and sale, and 
the stores of food and clothing which have not reached their 
consumers. Following through the process of production as 
we have already done, we may say that the wheat in the gran- 
ary, the sheep on the prairie, their wool after it is shorn, the 
cotton in the factory, the cloth in the hands of the dealer, and 
the clothes in the clothing-store are all circulating capital. 

One difference between the two capitals is that the one is a 
direct aid to production, while the other is not. They there- 
fore possess the quality of capital in different degrees. A loom 
is a direct aid to production ; without it we could not make 
cloth. The plough with its team of horses is a direct aid ; with- 
out it the farmer would have to use a spade, which would be: 
far less advantageous. The warehouse is such an aid because, 



II. 28.] OF CAPITAL. 87 

although it does not help the production, it preserves the goods 
from being spoiled by the rain or carried o2 by thieves. Ships 
and locomotives are direct aids in transportation. On the other 
hand, the wool and the cloth are not mere aids to production, 
but rather the material on which the work of production is 
performed. They are requisites of production, but not aids 
to it. 

"We may also consider circulating capital as that a definite 
quantity of which is consumed in the production of a definite 
quantity of any commodity. Thus, to make a coat a definite 
quantity of cloth is required. To make one yard of cloth of a 
certain kind a definite amount of wool is required. Thus we 
can trace the quantity of the substance through from the be- 
ginning to the end of a series of productive acts. On £he 
other hand, the needle with which the tailor sews the cloth 
may be lost before one coat is finished, or it may make a hun- 
dred coats without being worn out. "We cannot therefore say 
just how many needles are consumed in making a given num- 
ber of coats. 

A very important part of circulating capital is the store of 
food, clothing, and other necessaries of life which is laid up in 
the country for the consumption of the population generally. 
In fact, from the point of view of some economists, food is to 
be regarded as the primitive form of all capital. For, before 
the primitive farmer or mechanic could have made a plough, 
he must have collected the food to eat while he was making 
the utensil. During the process of manufacture the food dis- 
appeared and the plough appeared. We shall hereafter see 
that this idea materially assists us in understanding the subject 
by connecting labor with capital. From this point of view a 
pair of boots is simply a product of the following requisites : 

I. A certain quantity of leather, pegs, tacks, thread, wax, 
and other materials which went into the boot. 

II. A certain amount of wear and tear of tools, rent of work- 
shop, etc. 

III. The food which the shoemaker ate, the clothes which 



88 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 29. 

lie wore out, and the house-rent which he paid while he was 
making the boots. 

Since the pair of boots is the product of the consumption of 
this leather, furniture, workshop, house, food, and clothing, we 
may establish a certain equivalent between them which will as- 
sist us in further researches. The labor of the shoemaker was 
merely the agency which combined the three elements just enu- 
merated into a pair of boots. 

29. The Function of Capital. The great purpose of capi- 
tal, as indicated in its definition, is of fundamental importance 
and should be well understood. We may state it in the terms, 
Capital is employed as a labor-saving agent. 

To show how this is, let us take the case of the primitive 
farmer who tills the ground with a spade. As his condition 
improves, or as the country around him improves, he is enabled 
to substitute a plough and a pair of horses for the spade. To find 
whether this change is advantageous we have to compare the debit 
and credit side of the account. The plough and horses cost 
money, or, which amounts to the same thing, they required that 
the farmer should spend a certain amount of labor in procuring 
them and taking care of them. This is the debit side of the ac- 
count. The increased land which they enabled him to cultivate, 
or the diminished labor with which they enabled him to culti- 
vate his field, forms the credit side of the account. Unless the 
gain compensates for the labor spent in procuring the team, the 
latter has not paid for itself. In common language, it has been 
a bad investment. 

Again, in making cloth : a barbarian can make a robe out of 
coarse material with great labor. By spending his labor in 
making a loom he will be enabled thereafter to make a better 
robe with far less labor. If he, or the community to which he 
belongs, is able to construct a factory and use steam or water 
power, a still greater saving of labor is effected. But in all 
cases the labor saved must more than compensate for the labor 
of producing the capital. Unless the person who produces 



II. 30.J OF CAPITAL. 89 

the capital expects to save labor, lie would have had no object 
in producing it. 

If we look around us we will see that nature may be consid- 
ered as offering to those who will save, a perpetual interest upon 
their savings, if they employ them judiciously. An example 
is seen in the case of great public works. By the expendi- 
ture of a certain sum of money in digging the Suez Canal there 
is a perpetual saving not only for ourselves, but for future 
generations, in the number of ships, the quantity of sails and 
coal, and the labor of sailors necessary to transport goods 
from Europe to the East. By digging the Panama Canal there 
will be a similar perpetual saving of the voyage around Cape 
Horn. In each case the annual interest or profits on the 
canal will be the excess of the saving above the cost of work- 
ing the canal and keeping it in its original good condition. 
By tunnelling mountains a perpetual saving is made for the 
future in the cost of transporting goods across them. Every 
railway which is built diminishes the cost of transporting goods 
overland. Thus until men have dug every useful canal, built 
every necessary railway, and tunnelled every mountain which 
obstructs the transportation of goods from place to place, nature 
will offer to those who choose to save their earnings a per- 
petual interest upon their savings, provided they will employ 
them in such works. 

30. Capital the Result of Abstinence. It is clear that, in 
order to effect the gain thus described, the labor of producing 
the capital must have been withdrawn from the production 
of objects of immediate enjoyment. The primitive farmer 
who spent all his time in spading the ground in order to 
obtain a bare support for his family would never save money 
to buy a plough and team. He must do without a certain 
amount of the products of his labor as a condition precedent 
of being able to make the improvement. He may indeed 
buy his capital on credit, but, apart from the difficulty that 
his credit may not be good, it is then necessary that some one 



90 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 81. 

else shall have abstained from the enjoyment of the fruits 
of his labor, in order to produce the plough and horses. This 
last illustrates the case with the vast majority of men. They 
are in the enjoyment of a large amount of the previous labor 
of other men, for which they pay a profit. Thus the profit of 
capital, commonly called interest, is what is paid to the capi- 
talist, not for his labor, but for his abstinence from the enjoy- 
ment of the products of his labor, and his willingness to allow 
others to use his capital. 

It may be asked how circulating capital can be considered 
either as saving labor or as resulting from abstinence, and 
whether if it does not save labor it does not fail to perform 
the essential function of capital. It is true that it does not 
directly operate as a labor-saving agent, but only as an absolute 
necessity to the progress of the work. But it is a requisite of 
production which is not intended for the owner's own use, 
and in order to procure this requisite he must expend money 
which he otherwise could have spent in his own enjoyment. 
Since he practises abstinence, and since that practice is itself 
something which can command money in the public market, it 
follows that he must be compensated for it, and thus a profit 
must be paid on this investment just as it is paid on the in- 
vestment of machinery in production. 

31. Divided Ownership of Capital. The forms of capital 
which we have just considered include only material agencies 
actually employed in production. But in the language of 
business the word is used in what is apparently a much wider 
sense. Whenever men come to bankers to purchase bonds, or 
other credit property yielding interest, they are said to bring 
" capital." in order to invest it. In this case the idea is that 
the entity called capital is something which the owner puts 
into or invests in the bonds or other things which he purchases. 
But if we look closely into the matter we shall see that in this 
case the word is used to designate the money which one has 
saved up to pay for the bonds or stocks which he purchases. 



II. 81.] OF CAPITAL, 91 

But these bonds and stocks are also called capital. They 
may be government bonds, railway bonds, mortgages on real 
estate, or any immaterial rights by which one gains interest. 
We thus have two distinct meanings of the word in addition to 
that which we have already assigned it. This threefold use 
leads to a confusion which must be cleared up. In the origi- 
nal and proper sense of the word capital consists of nothing 
but wealth, namely, that wealth which is devoted to further 
production, or employed in such a way as to yield a profit to 
its owner. But we have shown that wealth may also be con- 
sidered in relation to its owner, and when thus considered we 
have called it property. We have also shown how a given 
piece of wealth may have various owners who have separate 
kinds of rights in it, and who may transfer these rights of 
ownership to other persons. 

Now the only difference between material capital actually 
employed in production and the bonds, stocks, notes, and other 
securities which people invest in is that the one is wealth, while 
the other is right of property in wealth. For the most part, 
the wealth to which this right pertains is material capital of 
some kind. Some illustrations will make this clear. 

Let us first notice the relation of railway bonds to the railway 
itself. Such a bond is not a part of the railway, but it is a 
right to a certain definite income from the earnings of the rail- 
way. In the same way railway stock is a right of property in 
the railway itself and its net earnings after its debts due thp 
bond-holders are paid. In these cases the wealth or real capi- 
tal is the railway itself, while the stocks and bonds are merely 
the evidences of certain rights in the earnings of the railway. 

Shares of stock in a company which loans money at inter- 
est consist in a right to receive a share of the income from 
the profits made upon forms of material capital, whether rail- 
ways, ships, or factories, which the company loaned their 
money to build. It is therefore property in capital, but not 
the capital itself. 

Since the money which one has saved up to invest is prop- 



92 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 31. 

erly considered a part of his wealth, we may call it capital, 
because he is going to buy capital with it, although it is not a 
direct aid to production. No confusion need arise from this 
extension of meaning. We now see that the word capital is 
used in three senses, closely associated, yet not equivalent : 

I. In the economic sense, as wealth employed for further 
production. This may be called absolute capital. 

II. To express the rights of ownership in absolute capital, 
which rights are secured by certain written and printed instru- 
ments called bonds, certificates, etc. 

III. To indicate the money which one has saved up and 
which he brings into market to purchase stocks, bonds, or other 
property in capital. 

QUESTIONS. 

1. Is it your opinion that the knowledge and skill in production which a 
man may acquire hy long practice and study should he regarded as a part 
of his capital? Compare the cases of two men, one of whom has saved his 
wages to he invested in bonds, while the other has employed his in educating 
himself so as to command higher wages. What would be the points of 
similarity and difference in the two cases? Point out the economic im- 
portance of exchangeability in such cases. 

2. A farmer who has annually expended $100 in the wages of men to 
thresh his wheat-crop concludes to invest $500 in a threshing-machine. The 
machine lasts him ten years, and at the end of that time can be sold for only 
$100. Its care and management have cost him $50 a year. Was it or was it 
not profitable? Would it have been profitable had he borrowed the pur- 
chase-money at 15 per cent per annum interest? At 20 per cent per 
annum? 

3. Our newer cities frequently borrow money for the purpose of improve- 
ments. By what criterion would you judge whether they were to be re- 
garded as negative capitalists? 

4. Are the street-cars and public carriages which run in our cities a part 
of the capital of the country? If not, in respect to whom are they algebrai- 
cally positive, and in respect to whom algebraically negative, capital? 

5. In what case are the books in a private library to be regarded as capital? 

6. Taking the view of the transformation of capital shown at the end of 
§ 28, what has a railway manager to show for the sustenance he consumes? 

7. Give some examples additional to those in § 29 of permanent improve- 
ments yielding a profit. 



II. 32.] OF LABOR. 93 



CHAPTER VI. 

OF LABOR. 

In the sense of the definition of labor given in § 2 it will 
be seen that nearly all men are laborers, because they are 
nearly all engaged in doing something for a living. The ex- 
ceptions would be capitalists who live entirely from the inter- 
est upon their investments, and owners of real estate who live 
entirely upon their rents. But the capitalist or owner gene- 
rally has a large surplus income which he has to manage, and 
in this case the work of managing it might legitimately be con- 
sidered labor. It is, however, little more than a question of 
taste whether to call it so or not. Leaving out of consideration 
this and other exceptional cases, we may see that every able 
adult man is doing something to make a living, and so may be 
called a laborer. 

32. The Economic Laboring Unit. Only a minority of the 
population which inhabits a country is actually engaged in 
economic production. The general rule is that the laborer has 
a wife and family to support. The former is lending him ma- 
terial help by cooking his food and mending his clothes; but 
there is no need of our complicating the matter by considering 
her a separate agent in production. The subject will be most 
easily treated by considering the laborer and his family as a 
unit in the social organism. The producing power of this unit 
is in our own country the work of the laborer himself. Its 
consumption is not only his individual consumption, but that 
of his whole family. Hence when, as in the last chapter, we 
consider the food and clothing consumed by the shoemaker as 
elements which go into the making up of a pair of boots, we 
ouo-ht to add the food and clothing consumed by his family. 



94 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 33. 

In most European countries the wife and even the chil- 
dren of the laborer are obliged to take part in the work of 
production. In this case we cannot so well consider the fami- 
ly as a unit, and in fact it would be rather difficult to define 
the unit with precision. Perhaps the best course would be to 
consider the number of men who could do the work of the 
whole family as representing the number of laboring units in- 
cluded in the family. We should then have to divide the 
consuming power of the family into that number of parts in 
order to get the relation of the productive and consuming 
powers. 

33. Distinction of Laborer and Capitalist. The typical 
laborer is a man who saves nothing from his income to assist 
him in future production, and who is therefore dependent upon 
some one else for the capital to render his labor effective. 
This definition applies not merely to the day-laborer, but to 
many in the higher walks of life ; to any one, in fact, who does 
not save money for investment, or own property or capital 
engaged in production. Such a person may be a physician, 
a lawyer, a clergyman, or a general. The philanthropic ten- 
dencies of society, which we shall hereafter have to consider, 
lead men to look upon those who live by manual labor as form- 
ing a class distinct from those who practise the professions or 
perform only mental labor. In economics this distinction is 
of secondary importance. Tet we should recognize it wher- 
ever any essential question depends upon it. 

It will be seen that the above definition of laborer would 
not include a shoemaker who owned his own tools and leather. 
He would be at the same time laborer and capitalist. Although 
the laborer and capitalist are so often identical, there is an 
advantage in considering them as economically distinct. We 
must therefore separate the functions of laborers from those of 
capitalists, even when they are united in the same person. 



II. 35.] OF LABOR. 95 

34. The Wages of Labor. If we define wages as mean- 
ing in the widest sense the gainings of the laborer, then we 
should consider all classes of laborers as receiving wages. The 
wages of the farmer and mechanic would be the value of his 
product sold after paying all the costs of raw material, rent, 
etc. It would therefore depend entirely upon his own abili- 
ty and exertions whether his wages were great or little. But, 
in the ordinary acceptation of the term, wages include only 
the moneys paid the laborer by an employer. This pay may 
be either according to the time employed, so much per day, 
month, or year, or it may be by the piece, as in the case of the 
physician and of many mechanical trades. In the first case the 
rate of wages would be defined as the amount paid by the em- 
ployer to the laborer per unit of time in exchange for the 
laborer's services. 

Although the term wages is in ordinary language thus re- 
stricted, yet the wider sense, which includes all earnings by 
the use of one's faculties, would be the more proper one in the 
general problems of political economy. When we have to con- 
sider the case of a person who is obliged to work for somebody 
else, in contradistinction to the person who is not, then, and 
then only, is a distinction between wages and other earnings 
necessary. 

35. Of the Different Kinds of Labor. Prof. F. A. Walker 
divides labor and laborers into the following five classes : 

I. The class who work for themselves and by themselves, 
either on their own land or in mechanical trades. This class 
would include small farmers taking part in the cultivation of 
their own ground, shoemakers who owned and sold their 
own products, as well as many other workers in mechanical 
trades. These persons combine the functions of laborer and 
capitalist. 

II. The tenant occupier of land who owns the whole pro- 
duce, subject only to the deduction for rent. 

III. Persons who render personal services for pay, but not 



96 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 35. 

in order to assist their employers in production. Such per- 
sons are domestic servants, soldiers, and clergymen. 

IV. Persons working for hire who are paid out of the 
product of their industry, and whose employers expect to make 
a profit out of their services. 

V. Persons who employ and manage labor, and who conduct 
and control business operations. 

There is, however, no one classification which will answer all 
the purposes of economics : the various kinds and conditions 
of labor merge into each other in such a way that a scientific 
classification is scarcely possible. Prom the point of view of 
practical politics the most important distinction is that between 
laborers who work by time, that is, who are employed by the 
hour, daj r , or month, and those whose gains depend entirely upon 
what they produce, irrespective of the time it has taken them 
to produce it. The importance of this distinction arises from 
the liability of workers by time to be dissatisfied with their 
wages. When one's gains depend upon what he actually does, 
he can more readily decide upon the justice or injustice of 
what he receives than when he works by time. Whether the 
day-laborer talks about his own wages, or whether the philan- 
thropic public talk about his wrongs, there is in either case 
an entire want of perception of the relation between the money 
he receives and the wealth which he is helping to produce. 
When one works by the piece for an employer, the evil is less- 
ened, though not entirely done away with. It may be difficult, 
and even impossible, for the laborer to decide to his own satis- 
faction whether what his employer pays him per piece is the 
just equivalent of what he does on that piece. Yet the rela- 
tion between his labor and what he receives from the product 
is more evident than in the case of the day-laborer. 

The man who sells the products of his labor directly to the 
public is on a higher plane than either of the preceding : he 
buys such materials as he needs where he can get them on the 
best terms, he labors as much or as little as he pleases, and he 
sells to the best advantage he can. His position is therefore 



11.36.] OF LABOR. . 97 

such as to give him a much more accurate view of his relations 
to society than if lie is subject to an employer. In buying his 
material he feels that he has the whole market to choose from, 
and that it is wise to be satisfied with the price which he is 
obliged to pay. If he finds that his product will not command 
so high a price this week as it did last, he accepts the result 
as one of the obvious necessary drawbacks of society, and does 
not fight against the inevitable as the day-laborer sometimes 
does. If he finds an increase in the price of his product, he 
takes prompt advantage of it, and does not see the employer 
get all the advantage of it as the day-laborer does. 

From the laborer's point of view it is unimportant whether, 
when he works under an employer, he is engaged in productive 
or unproductive work. That is to say, it makes no difference 
whether he is merely administering to his employer's gratifica- 
tion by taking care of his horses, beautifying his grounds, and 
administering to his wants, or whether he is making things for 
him to sell. But from an economic point of view this dis- 
tinction is the most important one of all. In other words, 
Walker's third class, whose services to society terminate with 
their employers, form economically a class by themselves, hav- 
ing entirely different functions from those of all other classes. 

36. The Modem Organization of Labor. If we compare 
our industry with that of past ages we shall see that its most 
remarkable feature is the large scale on which manufacturing 
operations are conducted, and the number of persons who con- 
tribute to each product. Necessarily connected with this is a 
complexity of operations formerly unknown. A hundred years 
ago there was only one best way known to make every part of 
a gun, and that way had been known and followed for so many 
generations that any person of fair mechanical talent could 
learn to make a gun as well as any one else. In nearly all the 
trades a regular apprenticeship was gone through with ; the 
boy became a journeyman, and the journeyman in time be- 
came a master- workman. Each did his work as generations 
7 



98 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 37. 

before him had done it, and each supplied only a limited com- 
munity immediately around him. Transportation was so cost- 
ly that nearly all bulky commodities had to be produced near 
the place where they were consumed, and none but those which 
had great value in a small space could be transported to any 
great distance overland, except at a corresponding disadvantage. 
Modern inventions, especially the steam-engine, the railway, 
and labor-saving machinery, have changed all this. Three new 
factors have come into play: 

I. The division and combination of labor. Instead of one 
man finishing an article for himself, he may do only a minute 
part of it, and it may go through scores of hands before being 
finished. 

II. The substitution of labor-saving machinery for human 
hands in production. Single pieces of machinery will do 
work which would have required hundreds of men ; thus pro- 
duction on a large scale is facilitated. 

III. The construction of railways, whereby it has become 
possible to collect and manufacture most articles in great cen- 
tral establishments. 

These three factors are inseparably connected. "Without 
cheap transportation manufacture on a large scale could not 
have been advantageous. Labor-saving machinery can be used 
only when the sale of the commodity is sufficiently great to 
justify the construction of the machine. 

3 1 ?. The Division of Tabor. The term division of labor 
is applied to that system under which, instead of each laborer 
completing an article of manufacture, a number of laborers 
divide the work up in such a way that each person shall do re- 
peatedly a small portion of it. A striking example is seen in 
a modern American watch-factory. Instead of one person 
making a whole watch, hundreds of hands unite their labors. 
Each different kind of wheel is made independently by a sep- 
arate person. Each person who makes these separate parts 
puts his product in a little case by itself. An operative takes 



II. 38.] OF LABOR 99 

from each case the parts necessary to make one watch, and 
puts them in a box. He is doing this nearly all the time. The 
box containing the parts necessary to one watch is handed to 
an operative near one end of a long table. This operative puts 
together a certain portion of the watch, and passes it to the 
next one. The operation is repeated as the box goes from 
hand to hand, and thus, in a few minutes, what at one end of 
the table had been a miscellaneous pile of screws, wheels, and 
pieces of brass appears at the other end of the table a finished 
watch. 

The advantage of the division of labor is that a given num- 
ber of persons can complete a much larger product than they 
could working singly. The reason of this is that a skill is ac- 
quired in the performance of one operation which could not 
be acquired if the person had to learn a great many operations, 
and that the time of passing from one to the other is saved. 
Moreover, the number of tools and other appliances required 
is greatly diminished. If one person had to finish the product, 
he would need to command all the tools necessary for all the 
processes. When doing but a single process, he only needs the 
tools necessary for that one. 

The disadvantage of the division of labor is that when car- 
ried to the fullest extent it dwarfs the mental development 
of the individual. But lamentations over the sad lot of the 
man who spends his whole life in making the tenth part of a 
pin belong to the moralist and philanthropist, rather than to 
the economist. Such a man may be regarded as an extreme 
example of the effects of civilization, since his life contrasts 
most strongly with that of the savage roaming at pleasure 
over the plains. 

38. Labor-saving Machinery. Before the invention of cot- 
ton-spinning machinery and power looms, wool had to be spun 
and cloth woven by hand. " Each weaver's cottage formed a 
separate and independent little factory. The yarn for his warp 
was bought by him in a prepared state, the wool for his welt 



100 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 39. 

was carded and spun by the female members of his family, and 
the cloth was woven by himself and his sons." * Of course the 
present system was not substituted for this ancient one at a 
single step. The greatest step, however, and that from which 
it is usual to date our modern cotton manufacture, was the 
invention of the spinning-jenny and throstle, by Hargreaves 
and Arkwright, about 1770. The result of this is that more 
cloth is now manufactured by a limited number of operatives 
than without machinery could be produced by the united labor 
of the whole world. 

The invention and application of labor-saving machinery is 
a process which is continually going on, and to which it is dif- 
ficult to see any limit. The mere enumeration of the kinds of 
machinery now used in special branches of manufacture would 
fill a book. The boots on our feet, the coats on our backs, the 
watches in our pockets, the furniture in our houses, are now 
mostly made by machinery, and all that human hands have to 
do is to direct and feed the machine. 

39. Steam Transportation. A century ago the number of 
people who could be supplied with any but the lightest articles 
of manufacture from a single point was greatly limited by the 
cost of transportation. It is difficult for us to imagine a state 
of things in which goods could be brought overland from one 
point to another only in wagons drawn by horses, mules, or 
oxen. Steam navigation has done much to facilitate trans- 
portation across the ocean, but has been more effective in facil- 
itating intercourse between men than it has in transporting 
goods, since even now the heavier and cheaper style of goods 
are still carried across oceans by sailing-ships. But on land 
the railway has worked a complete revolution. The most 
important effect of this revolution is this : that all but the 
heaviest goods can be carried a thousand miles at a cost which 
is comparatively small compared with that of their manufac- 

* Encyclopaedia Britannica, 9th edition. Art. Cotton. 



II. 40.] OF LABOR. 101 

ture on a small scale. Roughly speaking, the cost of trans- 
portation over long distances on the competing lines of rail- 
ways is from three quarters of a cent to two cents per ton per 
mile. A pound weight is carried from one to two thousand 
miles at the cost of a single cent. If a pair of boots be made 
in New York and delivered in Chicago, the additional cost due 
to transportation will not be ten cents. 

Thus arises a tendency to concentrate in great establish- 
ments the manufacture of those articles which are widely used 
and are not very heavy. We may imagine that ten millions 
of people scattered over a tract a thousand miles broad could 
have all their clothing, boots, furniture, and books made at one 
central point. This would enable the division of labor to be 
carried to the greatest extent, the most improved forms of 
machinery to be introduced, and all the advantages of manu- 
facturing on a large scale to be made available. Although this 
state of things is by no means reached, we see a continual 
approximation towards it, in the increasing number of great 
manufacturing establishments which can supply large tracts of 
country with goods more cheaply than they can be made in 
the place where wanted. 

To do this successfully requires organization. In organiza- 
tion two elements are necessary : there must be willingness on 
the part of laborers to become parts of the organization, and to 
work conscientiously and persistently in that capacity, and 
there must be organizers of their labor. To the latter class 
our attention is next to be directed. 

40. Tlie Organizers of Labor. If the laborers whose 
work is to be combined in the modern system could all work 
together in unison, and do everything necessary to success 
without any one to guide and direct them, modern society 
would be very different from what it is. But as a matter of 
fact they cannot do this. Thus the necessity of an organizing 
power arises. This organizing power is as important as the 
labor itself; and in one sense it is more so, because there are 



102 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 40. 

hundreds of men who are fit to labor to one who is fit to 
organize and direct. 

We may illustrate the necessity of an organizer by adducing 
a familiar and not at all extreme case, that of building a 
house. When one looks at a house in connection with labor, 
he is prone to think of it merely as the product of the work 
of so many bricklayers, hod-carriers, carpenters, plasterers, 
and glaziers. But if we look closely into the matter we can 
see how badly these laborers would have got along without 
a managing head. The bricklayers would not have known 
where they could have bought the brick and sand suited to the 
house on the most economical terms. They would probably 
get all their material at once, and on mixing their mortar find 
that they had forgotten the necessity of its ripening before the 
building was commenced. During the week or two required 
for this purpose they might have to remain idle. On com- 
mencing work they would have endless trouble in deciding 
what each man should do and how the money should be 
divided. They would probably misunderstand the plans, build 
wrong, and have to begin over again in consequence. When 
the time came to put in the first window-frame they would 
find that the carpenters were not ready with the material, and 
would have to wait for them. The same difficulty would 
occur in laying the joists, and would repeat itself oftener 
and oftener at every stage of the process. The final result 
would be either that the house would never get built at all or 
would get very badly built, and that only after the men had put 
into it twice as much labor as they would have done under 
competent direction. 

To describe the functions of the manager more in detail : 
He must see that all the necessary raw materials are purchased 
in the best markets and at the proper time ; that they are of 
proper quality and are suited to his machinery and labor; that 
they arrive at the factory at the proper moment ; that the fac- 
tory is ready to receive them, and that they are so cared for 
as not to suffer deterioration from any external or internal 



II. 41.] OF LABOR. 103 

cause ; that the machinery is kept in good order ; that the 
various employes know their business ; that the least possible 
amount of waste occurs while the processes are going on ; that 
the tilings made are those which other people want, and that 
they are made in the proper quantities ; that arrangements are 
made for preserving them until they can be sold ; that the em- 
ployes are paid at the proper times ; that useful improvements 
in the machinery are introduced, while no money is wasted in 
unsuccessful experiments ; that the proper number of opera- 
tives are at work in every department, and that they are the 
persons best suited to perform their respective duties. In a 
word, the manager must see that every one of the countless 
causes that might lead to the injury of so complicated and deli- 
cate an organization is carefully guarded against. The ability 
$o do all this well is so rare that we must look upon the manager 
as the most important factor in the work of production on a 
large scale. 

41. The Efficiency of the Laborer. We have spoken of 
the laboring unit in a way which might imply that one such 
unit could be considered the equivalent of another. Such, 
however, is by no means the case. It is impossible to measure 
the labor of a railway manager and that of the digger of a 
canal by any common standard. This is obvious enough. But 
it is also true, though not so obvious, that we cannot assume 
any equality between laborers of different classes, even when 
they are engaged in similar kinds of work. The result of the 
day's work depends upon the man who does it, what he does it 
with, and what he does it for ; and when any of these three 
factors are different the result is different. Laborers differ 
among themselves in hereditary capacity for work, and their 
efficiency depends upon their food and their abilities. A 
single beef-fed English laborer is the equivalent of several, 
we could hardly say how many, under-fed Russian peasants. 
If we are to compare them, we should consider a group of the 
latter as representing a single one of the former. 



104 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 41. 

Disposition to labor is equally important with physical 
strength. Certain races of men will not work more than ab- 
solutely necessary for their subsistence on any account what- 
ever ; other races would be unhappy without constant employ- 
ment. 

This explains the fact that those countries where wages are 
hio-h compete successfully with those where they are low. For 
example, although nominal wages are fifty per cent higher in 
America than in England, and twice as high in England as on 
most of the continent of Europe, yet American manufacturers 
of cotton can compete with those of England on even terms, 
while but few European countries can compete with either of 
them, and feel obliged to protect their home manufacturers by 
protective tariffs. The docility and know-how of the American 
enables him to manage machinery so much better than his 
European competitor that the cost of the labor put into a yard 
of cotton is actually less here than in any other part of the 
world. 

Of course the efficiency of the laborer depends also upon 
his adaptation to his special work. For the work of digging a 
canal nothing but physical strength is necessary. But if we con- 
sider any work higher than that of carrying and digging, we 
shall find that the laborer needs qualifications of a higher order 
than mere physical strength. If he learns a trade, the time 
required for this purpose will depend largely upon his natural 
aptitude. If he does not possess a certain amount of skill he 
can never be entrusted to manage a machine. Thus his effi- 
ciency would be greater or less according to his natural or 
acquired qualities. Finally, it goes without saying that one 
class of laborers might do one kind of work better, and another 
class another kind. As an example showing how national habits 
affect the efficiency of labor, we may cite a drawback under 
which manufacturers labor in Russia. The religious holidays, 
which the common people of that country consider it impera- 
tive to observe, are so numerous and come at such irregular 
intervals, that great manufacturing establishments requiring 



II. 42.] OF LABOR. 105 

regularity for their economical management can scarcely be 
managed without the aid of foreign labor. When the holiday 
comes, the Russian laborer must leave his work no matter what 
the state of affairs, the pressure of steam, or the need of his 
being present to carry on the operations of the establishment. 

42. Friction of Exchange. The kinds of labor described 
in the preceding sections are those entirely devoted to the 
work of production. But if we use the terms labor and laborer 
in their most general sense, we should include all exertion of 
the human faculties necessary to keeping the social organism in 
operation. Among the operations necessary for this purpose, one 
of the most important is that of exchange ; hence whatever time 
or work is required in effecting exchanges should be included 
under the head of labor. We have, therefore, another class of 
laborers whose function it is merely to buy, to take charge of 
and to sell commodities, without any changes being made in 
them in other respects. This class includes bankers, brokers, 
merchants, shop-keepers, and retail dealers of every kind. 

On a superficial view this labor does, not really appear to be 
a necessity of the social organism. If the producer of a com- 
modity sends it at his own expense to the very place where the 
consumer lives, and the latter is willing to go and get it, why 
should a third party step in to take a portion of the price ? The 
answer is that if his services were not valuable, men would cer- 
tainly not pay for them. Quite possibly, if human nature were 
a little nearer perfection than it is, and if men knew their 
wants exactly and adopted the best system for supplying them, 
we could get along with a good deal less labor in conducting 
exchanges. There is a certain analogy between the necessity 
for this labor and friction in machinery. In a perfect machine, 
as it is conceived in the mind of the mathematician or phy- 
sicist, there need be no friction. But in all machines actually 
made by man there is friction, and the mathematician who 
calculates the forces necessary to run it must take this friction 
into account as a resistance requiring additional power to be 



106 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 42. 

applied. So the cost of getting a barrel of flour from a 
firm in New York City to a baker in England is not only 
the cost of freight and of the handling and carrying of the 
flour, but also certain profits or wages of jobbers, grocers, ship- 
pers, and others who have to buy the flour from one party and 
sell it to another. From the analogy of this labor to the power 
required to overcome friction in a machine we shall call what 
it overcomes friction of exchange. 

In the wholesale markets, where goods are bought and sold on 
a large scale, the friction of exchange is very small. It attains 
its minimum in the sale of stocks at the great money centres. 
The commission of the broker is here only about one eighth of 
one per cent. It is larger where goods of any sort are traded in, 
because the man who buys the goods must always run some risk 
of their deteriorating on his hands ; but in wholesale transac- 
tions it is still too small to be a very important factor in the ulti- 
mate price to the consumer. The friction attains its maximum 
in the sale at retail of those commodities which are most likely 
to deteriorate or become worthless in the hands of the dealer. 
It is also great in the case of those goods sold in quantities so 
small that the time spent by the dealer in showing them to his 
customers, or wrapping them up, has a value equal to an impor- 
tant fraction of the value of the goods. For reasons which the 
reader can readily work out for himself, books, fancy goods, 
including haberdashery, and fresh vegetables, are among the 
things for which the friction of exchange is greatest. 

With the labor necessary to overcome the friction of exchange 
• must be included that of merely inducing people to buy things 
which they would not buy if left to themselves. Yery often a 
man who does this successfully may get one third, one half, or 
even two thirds of the price. The labor of travelling book- 
agents is an example. In country districts, where there are no 
stores within convenient reach, the services of peddlers may be 
really necessary, but in cities we must consider their principal 
function to be that of persuading people to buy their wares. 



II. 44.] TEE INCREASE OF POPULATION. 107 



CHAPTEE VII. 

THE INCREASE OE POPULATION. 

43. If the population of the world were immortal, the gen- 
eral conditions of production, exchange and consumption 
would not differ materially from those that actually exist. 
Hence in the general review which we have thus far taken, it 
has not been necessary to consider the economic effect of the 
continual death of men, and of the constant stream of new births 
by which the ranks of humanity are kept full. But when we 
apply economics to social questions, it often becomes necessary 
to take the effect of human mortality and growth into account. 
The introduction of this additional cause affecting wealth nec- 
essarily modifies our economic conclusions, and requires new 
and different statements. The general rule is that every man 
not only has to live, but to support his family also. The princi- 
pal question which arises in this connection is that of the eco- 
nomic effects of the more or less rapid increase of population. 
These effects were discussed in all their relations, and elaborated 
into a complete system, by Malthus, in "the early part of the 
present century, and, in consequence, the conclusions to which 
he was led are commonly known as the Malthusian theory of 
population. This theory has been accepted as sound by a large 
majority of economists ; and those who have contested it have H 
probably done so from a misunderstanding of its true import. 
"Without attempting to follow Malthus in detail, we shall pre- 
sent the theory of population in as clear a form as possible. 

44. Let us suppose that every married pair has four chil- 
dren who grow to maturity, marry, and have four more chil- 
dren, and so on indefinitely. It is evident and certain that 
in such a case the population would double with every genera- 



108 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 44. 

tion. If the average duration of the generation was one third 
of a century, then in 33£ years the population would be mul- 
tiplied by 2, in 66f years by 4, in 100 years by 8, and so on. 

Continuing the process, we see that the population would be 
multiplied by 8 during the period of every century. That 
is, it would increase in a geometrical ratio, or in geometrical 
progression. 

The ratio of this progression would of course depend upon 
the average number of children in each family who grew to 
maturity and married. If this number were only three instead 
of four, then the population would only increase by 50 per 
cent in each generation, and a little more than 3£ times in 
each century. That is, the rate of increase will depend on 
the fertility of the population. It is, however, evident that if 
all the conditions remained the same, generation after genera- 
tion ; if each generation had precisely the same degree of health, 
and the same appetites and means of support as its predecessors ; 
if the difficulty of supporting a family did not in any manner 
change, then the rate of increase would always be in the same 
ratio ; that is, the numbers of the population at any equidistant 
periods of time would form a geometrical progression. This 
fact was expressed by Malthus in the statement that population 
tends to increase in this progression — a statement which his 
opponents frequently misstated by assuming it to mean that 
population does actually thus increase under all times and cir- 
cumstances. 

There is nothing in what we have said which presupposes 
any definite rate of increase. If, instead of four or three, only 
two children of each family should grow to maturity and 
marry, there would be no increase at all. If only one, the 
population would be reduced to one half in each generation. 
But the law would still be that of geometrical progression, the 
only difference being that in the one case the common ratio of 
the progression would be unity, and in the other it would be 
less than unity. 

The general rule is, however, that as men are actually con- 



II. 45.] THE INCREASE OF POPULATION. 109 

stituted the ratio will be considerably greater than unit}*, unless 
the increase of population is kept down by external causes. 
Yet apart from these causes different races and classes of men 
show very different degrees in the tendency to increase. 

45. It will conduce to clearness if we begin by considering 
the causes which tend to check the increase. They belong to 
two classes. 

Firstly, moral causes acting upon the individual and leading 
him to postpone or avoid marriage. 

Secondly, physical causes resulting in the death of offspring. 

The first of these causes is probably a product of civilization. 
Savage and barbarous tribes propagate almost entirely by vir- 
tue of an animal impulse, and without consideration of what 
shall become of the creatures who owe their origin to that im- 
pulse. This is true not only in the lowest states of society, 
but frequently among the lower orders of some civilized socie- 
ties. The lower order of the colored population in the United 
States may be taken as a case in point. The wants of this 
class of people are so simple, and, in our country, so easily sup- 
plied, that the problem of supporting a family is one to which 
little consideration is given in contracting the marriage rela- 
tion. This, of course, is due also to the improvident character 
of the race. Statistics show that the problem of supporting 
a family exerts a much more serious restraint upon the lower 
classes in European countries, who before they marry take 
into consideration the necessity of supporting children. 

As we ascend the social scale we find the restraining influ- 
ence to increase, and to reach its maximum with those classes 
who have a social position to sustain and but limited means to 
sustain it. The wealthy classes in all countries, being above 
the fear of want, are subject to no moral restraints from this 
source. 

Secondly, when moral restraint proves an insufficient induce- 
ment to the keeping down of increase* then want and disease 
step in and do the work by carrying off those children who are 



HO DESCRIPTION OF THE SOCIAL ORGANISM. [II. 46. 

least fitted to cope with the world. Infant mortality attains 
its maximum among the lower orders of men and the crowded 
poor of great cities, and is at its minimum among the classes 
who are able to supply their children with everything neces- 
sary to their continued existence. 

It must be specially remarked that these two causes operate 
very differently among different classes of people. The first 
principally affects the middle intellectual and professional 
classes, and has little influence upon either the wealthy or the 
most degraded ones. The second cause operates principally 
among the poor, and among them naturally varies inversely as 
the first cause; in other words, the less moral restraint the 
poor impose upon themselves the greater the mortality among 
their children. 

Eliminating the two causes just described, we shall have the 
measure of the unrestrained tendency to increase. This, as 
already remarked, is very different among different people. In 
France it is so small that, notwithstanding the small amount 
of emigration, the increase of population is very slow. The 
same is true of native Americans. Although our population 
has very generally increased by nearly 30 per cent in every 
decade, it would seem from the Census reports that the largest 
portion of that increase comes from immigration or from for- 
eign-born parents. The state of things thus indicated is one 
most worthy the attention of the student of social science. 

46. This conclusion that different classes of men tend to 
increase at different rates gives rise to one of the most impor- 
tant questions affecting the future of our race. Enlightened 
men now recognize the fact that the qualities of the children 
born into the world are determined by natural causes. In 
individual cases the causes entirely elude our scrutiny; but 
when we consider general averages among large collections of 
men, we have open to us a very fruitful field of investigation. 
The maxim "Like produces like" is found to be an approxima- 
tion to the truth in the general average case. For example, 



II. 46.] THE INCREASE OF POPULATION. HI 

statistics show that vigorous and healthy parents have a larger 
proportion of vigorous and healthy children than weak and 
sickly parents do. Talented parents have a larger proportion 
of talented children than dull parents do. Qualities very fre- 
quent in certain races are almost unknown among others. The 
laboring classes in European countries rarely, if ever, give birth 
to children capable of rising above the station in which they 
are born. Certain races of men are incapable of understand- 
ing the methods of scientific investigation. The student of 
ethnology finds differences among men who to the ordinary ob- 
server are quite alike in all their qualities. The success of 
the English people is very largely due to a common-sense turn 
of mind, leading them to look upon things as they actually are, 
and to govern themselves accordingly, instead of being carried 
away by the search after " el Dorados " and Utopias which has 
been the curse of the world. 

When the laws of descent are more fully investigated, it will 
probably be found that the characters of children depend not 
only upon the characters of the parents, but upon their sur- 
roundings. It may possibly be found that when a race is 
thrown into a new situation, by emigration or otherwise, and 
its members thus stimulated to new activities and brought into 
new relations to the world, a higher average of talented off- 
spring is the result. The establishment of such laws is, how- 
ever, still a work of the future, and until they are established 
a satisfactory theory of population is out of the question. 

The economic application of the preceding principles arises 
in this way : The kind of labor in which a man is fitted to 
engage depends very largely upon the qualities with which he 
is born. We may trace a regular gradation in the orders of 
labor, from the work of the day-laborer, which is at the bottom 
of the scale, up to the functions of the great administrator, 
ruler, and philosopher, which are at the top. The higher up 
we go, the rarer the combination of natural qualities which the 
work requires, and, by a law of value hereafter to be laid down, 
the more important are we to regard the work. The good of 



112 DESCRIPTION OF THE SOCIAL ORGANISM. [11.47. 

society requires that the number of people who are born ca- 
pable of performing each separate kind of labor should be 
approximately proportional to the number required for its 
performance. Measured by this standard, there has been up 
to the present time a comparative scarcity of men of the 
higher orders, and a comparative redundancy of men of the 
lower orders. The question whether this inequality is to in- 
crease or diminish in the future is involved in the law of 
descent. So far as our imperfect knowledge of the subject 
enables us to see into it, the balance of evidence seems to 
threaten a continued scarcity of the higher orders of men. It 
.would seem that the race, in this country at least, is less pro- 
lific the higher we ascend in the intellectual and social scale. 
There would therefore be an absolute diminution in the pro- 
portion of men capable of performing the higher functions of 
society, were it not that such men are born to a greater or less 
extent among all classes of society. This continual replenish- 
ing of the higher ranks from births among the lower ranks 
encourages us to believe that the former will, at least for some 
time to come, keep their relative numbers ; but whether these 
numbers will increase in the proportion that philanthropists 
would like to see them increase is still an open one. 

47. The Malthusian theory of population is so frequently 
misapprehended that it has almost become a by-word among 
some economic thinkers. It is proper, therefore, that we 
should see clearly in what it consists. It applies to the ques- 
tion of an increase of population the same method which is to 
be applied in all scientific investigation ; that is, it considers the 
causes one at a time, commencing with the most general ones. 
In economics the most general causes are the qualities of 
human nature, because these are found among all men, while 
other causes depend upon the situation in which men are 
placed. Now, considering only the tendency of the race to 
propagate, and making abstraction of all changes in its condi- 
tion, it is unquestionably true, as already shown, that the popu- 



II. 47.] THE INCREASE OF POPULATION. H3 

lation will increase in a geometrical progression, the common 
ratio of which will depend upon the disposition to propagate. 
This common ratio is greater than unity among almost all races. 
We might almost say that it is necessarily greater than unity, 
because if less than unity the race will die out by virtue of its 
own inherent tendencies. Now it is certain that the number 
of individuals who could gain a subsistence upon the surface of 
the earth is limited. It is therefore perfectly certain that if the 
tendency to propagate should act without any restraining influ- 
ence whatever, the ultimate result would be a larger popula- 
tion than the earth could support. 

So much has been proved by Mai thus. Those who misap- 
prehend the theory interpret it as meaning that the increasing 
numbers will be kept down by positive starvation. But this 
does not follow at all. We have already shown that a moral 
restraining influence is always at work, at least among the in- 
telligent classes. To say that a time may come when the whole 
race cannot find adequate subsistence is the same thing as say- 
ing that certain classes of men will not be able to support large 
families. Now the question whether a man will or will not be 
able to support a family is one which he can himself decide in 
advance. Intelligent people reaching a decision on this point 
will govern themselves according!} 7 . It is only the unintelli- 
gent and reckless classes who will give no consideration to the 
subject. The only question, then, which can remain is whether 
we shall always have a reckless class of this kind in such num- 
bers as to exceed the limits imposed by the conditions of sub- 
sistence. This question is one which the future alone can 
answer. All the economists of the presenftime can do is to 
gain a clear conception of the various causes at play, and then 
to proceed intelligently in the investigation of the laws of 
descent. 



114 DESCRIPTION OF TUE SOCIAL ORGANISM. [II. 48. 



CHAPTER VIII. 

OF FLUCTUATIONS IN ECONOMIC PROCESSES. 

48. If the population of the country were nearly invaria- 
ble ; if each individual of that population ate the same quanti- 
ty of each kind of food year after year ; if he wore the same 
kind and number of clothes; if there were no change of 
fashions in life ; if no improvements were made in the mode of 
supplying wants, then there would be no great fluctuations in 
business. Every producer would know beforehand how much 
of his product would be demanded by the community, and at 
what price ; he could make his calculations and employ his la- 
borers accordingly, and those embarrassments which so trouble 
the whole business community would be nearly unknown. As, 
a matter of fact, however, modern improvements in organizing 
the productive capacities of society have introduced fluctua- 
tions in nearly every department of trade. What was fashion- 
able last year in ladies' wear is not fashionable this year ; and 
what is now fashionable may not be wanted hereafter. Thus 
manufacturers and dealers are in a state of uncertainty as to 
what product they should make in order to meet the future 
demand, and have to run the risk of losing money by making 
what they cannot sell, or of failing to gain a profit by not 
making what is wanted. If every producer could make one 
thing as easily as* another, and if the machinery constructed 
for one purpose could be applied to another, the drawbacks 
arising from this cause would not be serious. But neither the 
machinery nor the operatives of a great factory can suddenly 
change their work without loss. The greater part of the ma- 
chinery of almost any great factory would be nearly worthless 
for any other purpose. Yet, since the demand does change 
from time to time, it is essential that, so far as possible, many 



II. 49.] FLUCTUATIONS IN ECONOMIC PROCESSES. US- 

agencies employed in production shall admit of being adapted 
to a new employment. We have to consider how this adapta- 
tion is effected, and at what disadvantages. We begin with 
changes in the pursuits of men. 

49. Changes in the Direction of Labor. It is sometimes 
assumed that there is no power of adaptation among men, and 
that they are as incapable of turning to new employments as 
the machinery in the factory is of being turned to new uses. 
Of course this is a subject on which we can lay down no uni- 
versal propositions, because the case differs with different men 
and with different employments. The inhabitants of some 
countries have much more versatility than those of others. 
Americans are supposed to possess this quality ■ in a high de- 
gree, and are, among all people, those who are best able to 
change their occupation in obedience to a change of demand. 
The watchmakers of Switzerland and the spinners of Man- 
chester approach the other extreme, in being able to do little 
but what they have been taught to do. Again, adaptability 
varies with the nature of the employment. As a general rule 
education increases this quality, while a lifetime of training in 
a specialty diminishes it. A professor of one science can com- 
monly teach another, and a merchant who is successful in one 
kind of trade can generally change to another. On the other 
hand, the cases in which mechanics can change their occupa- 
tion without disadvantage, though not rare, are exceptional, 
and more exceptional as the occupation is specialized. 

We have now to show that although men may not be able 
to change indifferently from one occupation to another, yet, 
indirectly, industry may be diverted from one occupation to 
another without serious disadvantage. We may place the ques- 
tion in the following shape : From the fact that a shoemaker 
cannot make clothes does it follow that, in case fewer shoes and 
more clothes should be required, the producers of shoes and 
clothes cannot adapt their production to the new state of 
things? The answer is, it does not so follow. Productive 



116 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 49. 

industry may be changed from one channel to another without 
individual men changing their occupation directly from one to 
the other. The change may be effected in two ways, which 
we shall illustrate by showing how a certain amount of industry 
could be changed from the occupation of making shoes to that 
of making clothes. 

It must first be remembered that, from various causes, men 
are continually leaving each occupation and new ones are tak- 
ing their places. They are leaving in consequence of death, 
of old age, of inability from various causes, as well as from 
change of occupation. If no new hands should engage in the 
work of making shoes during the next ten years, it is highly 
probable that the number of persons engaged in the occupation 
would be reduced to one half through the causes just cited. 
This may even be an under-estimate ; it is not unlikely that from 
ten to twenty per cent leave the occupation every year. Now, 
there are few if any commodities the want of which by the 
community can fall off permanently in a more rapid ratio than 
this. Hence diminished demand for any one commodity may 
be completely responded to by no new producer undertaking 
the work of producing that commodity. 

Conversely, it is readily seen that an increase in the produc- 
tion of clothes can be brought about by a corresponding increase 
in the number of young men and women who learn to make 
clothes. Thus we have industry changed from shoemaking to 
clothes-making, not by individuals passing from one occupation 
to the other, but simply by having those young men who would 
have joined the ranks of shoemakers change their purpose and 
join the ranks of tailors. 

The other method of making the transfer is also an indirect 
one. Let there be an increased demand for clothes and a 
diminished demand for shoes. It will be found that a certain 
number of persons now engaged in miscellaneous occupa- 
tions can forsake those occupations and become tailors. Per- 
haps they were once tailors. Let the occupations they leave 
be A, B, and C. Then we shall have occupations A, B, and 



II. 50.] FLUCTUATIONS IN ECONOMIC PROCESSES. 117 

C requiring additional laborers to fill the vacancies thus 
arising. Some of these vacant places may be filled by the 
shoemakers. If the shoemakers themselves cannot fill them, 
other people can do so whose places the shoemakers can take. 
There may be a chain of any length, occupation Z being sup- 
plied from occupation T, occupation Y from occupation X, 
and so on, until we find one which is supplied by the unem- 
ployed shoemakers. Now since in all these operations the 
number of people engaged in these intermediate occupations 
has remained unchanged, while there has been an increase of 
tailors and a diminution of shoemakers, the result is the same 
as if a certain number of shoemakers had changed their occu- 
pation to that of making clothes. "We may therefore assume 
that it is possible for industry to change from one occupation to 
another in response to the fluctuations of demand, and that this 
will result in the same way as if every producer could change 
from one occupation to another at pleasure. 

50. Competing and Non-competing Groups. Are we to 
assume that there is no limit to the changes which may thus be 
made in the industry of a country? Can every occupation be 
indirectly recruited from the ranks of those engaged in any and 
every other occupation? It is evident that we cannot answer 
this question absolutely in the affirmative. It is certain that an 
increased demand for college professors and railway directors 
cannot, even indirectly, be immediately responded to from the 
ranks of day-laborers. On the other hand, it is equally difficult 
to lay down an absolute line and say that no person from below 
this line can step above it. We must admit that an increased 
demand for college professors could be partly met by promot- 
ing teachers of high-schools ; the places of the latter could be 
filled by teachers now of a lower order, and these places again 
might be filled by men in various ranks of life who possess the 
art of teaching ; their places by men of a lower order, and so 
on ; so that it is difficult to say just where the limit would be 
found. 



118 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 50. 

If, however, we go in the opposite direction, we shall find 
limits which, though not absolute, cannot be far overstepped. 
As a general rule it will be impossible for the class of un- 
skilled laborers to engage in any occupation requiring skill, 
how great soever may be the demand. The very fact that 
they are unskilled laborers shows that they do not possess the 
qualities necessary to fill higher places. The latter command 
higher wages ; and the fact that they are unable to command 
these wages shows that the defect is inherent in their constitu- 
tion, and cannot be overcome, how great soever the induce- 
ment offered. They can change from one unskilled occupa- 
tion to another : ploughing, tending horses and cattle, digging 
streets, planting, driving carts, and carrying hods are all open 
to them. In fact, it might be considered that the range of 
their possible occupations is wider than in the case of any other 
class, since there is no limit to the number of little things 
which a community would like to have done to promote its 
pleasure. Every owner of an acre lot would like to see it cul- 
tivated and planted with flowers ; improved streets are needed 
in every city ; with every increase of population more labor 
must be devoted to cultivating the ground. The result is that 
the demand for unskilled labor, although in one sense not large, 
yet in another sense is unlimited ; and it is not an exaggeration 
to say that the unskilled laborer has more employments open 
to him in his grade than any other member of the community. 

Skilled labor may be defined as that which requires a longer 
or shorter course of training in the use of the eye and the 
hand, but which does not require any training of the intellect. 
Since intellectual labor is generally more agreeable and better 
paid than skilled manual labor, it may be generally assumed 
that those who engage in the latter are incapable of the former. 
Yet the line is not at all impassable. The most we can say is 
that only a small minority can pass it. Moreover, skilled labor- 
ers are those who find it most difficult to pass from one occu- 
pation within their plane to another. The case of vacancies in 
the ranks of tailors beino- filled from the class of shoemakers is 



H. 50.] FLUCTUATIONS IN ECONOMIC PROCESSES. \\Q 

an extreme one. It is much easier for either the day-laborer 
or an educated man to pass from one occupation to another 
than it is for a skilled laborer to do so. 

The class of intellectual laborers, or those engaged in occu- 
pations requiring a high degree of education, can generally 
change their occupation upon their own plane without difficul- 
ty. But even here all occupations are not open to all edu- 
cated men. An increased demand for eminent lawyers, skilful 
surgeons, and eloquent preachers cannot be responded to by 
any great increase in the number of those who can perform 
such functions. The response comes in the shape of increased 
prices for their services. 

There is a grade which may be economically considered as 
yet higher, with which no competition from the lower grades is 
possible. It is that of the great organizers and administrators 
who manage the business affairs of the country. An increased 
demand for railway presidents can with difficulty be met. The 
number of people who can successfully carry on the operations 
of a great factory is very small. Correct judgment of demand 
or supply in the market cannot be bought for money. No 
amount of training can make a great novelist without natural 
qualities to begin with. 

The idea of dividing the industrial population into non- 
competing groups was first worked out by Mr. Cairnes. He 
supposed a division into four groups instead of three as is sup- 
posed above. " First, at the bottom of the scale there would 
be the large group of unskilled or nearly unskilled laborers, 
comprising agricultural laborers, laborers engaged in miscella- 
neous occupations in towns, or acting in attendance on skilled 
labor. Secondly, there would be the artisan group, comprising 
skilled laborers of the secondary order — carpenters, joiners, 
smiths, masons, shoemakers, tailors, hatters, etc., with whom 
might be included the very large class of small retail dealers 
whose means and position place them within the reach of the 
same industrial opportunities as the class of artisans. The third 
layer would, contain producers and dealers of a higher order, 



120 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 50. 

whose work would demand qualifications only obtainable by 
persons of substantial means and fair educational opportunities 
— for example, civil and mechanical engineers, chemists, opti- 
cians, watchmakers, and others of the same industrial grade, in 
which might also find a place the superior class of retail trades- 
men; while above these there would be a fourth, comprising 
persons still more favorably circumstanced, whose ample means 
would give them a still wider choice. This last group would 
contain members of the learned professions, as well as persons 
engaged in the various careers of science and art, and in the 
higher branches of mercantile business." 

It is not possible, however, to assign any definite number to 
these groups; indeed the term group is used to facilitate the 
thought rather than to express the fact. The difference be- 
tween men is one of degree and not of kind, the main fact being 
that each employment is open only to a limited class, and that 
the higher the employment the more limited is the class which 
can engage in it. 

The conclusions hereafter to be drawn from this grouping 
of men are of the utmost importance in estimating the 
effect of changes in production upon the welfare of the 
different classes of society. All such changes are produc- 
tive of increased demand for some kinds of services and 
diminished demand for other kinds. If these variations 
of demand can be met by corresponding changes of occu- 
pation, either directly or indirectly, in the ways pointed 
out, the equilibrium will be kept up. If they cannot be so 
met, there will be a disturbance of the equilibrium, to be re- 
stored only by a different scale of relative wages ; one class 
commanding more, and another less, after the change. To 
foresee the effect of these changes we must refer principally 
to the past to see what their effect actually has been. In 
special cases, however, the principles above laid down will 
generally enable us to reach a fairly definite conclusion. 



11.51.] FLUCTUATIONS IN ECONOMIC PROCESSES. 121 

51. Transformability of Capital. Capital admits of be- 
ing changed from one form to another, as labor admits of be- 
ing employed in one direction or another. The transforma- 
tion cannot be made so speedily as the transfer of labor ; but, 
if we take time enough, there is no limit to its extent, as 
there is in the case of labor. A cotton factory can be changed 
into an iron ship with more economy than a hod-carrier can 
be turned into a lawyer. It is true that the transformation of 
capital necessarily involves a change in the direction of labor, 
but this change is mostly from one employment to another of 
the same order, and can be effected in the way just pointed 
out. 

When we speak of such a transformation as that of a fac- 
tory into a ship, we of course use the word in a different 
sense from that employed when we speak of transforming 
wool into cloth. To effect the transformation it is not neces- 
sary that any portion of the factory should be used in the ship ; 
the result is brought about through changing the direction of 
labor from the work of keeping up the factory to the work of 
building the ship. The possibility of this being done without 
a total loss of all the value invested in the factory arises from 
the fact that the latter is continually wearing out, or, as already- 
shown (§ 14), capita], like every other kind of wealth, is un- 
dergoing a constant process of consumption. The consump- 
tion of wealth which is capital differs from that of wealth 
which is not capital, or unproductive consumption, in this : 
that the value consumed is, in, the case of productive consump- 
tion, reproduced under a new form and in increased amount, 
while in unproductive consumption we have nothing to show 
for the thing consumed except the benefits rendered to the 
consumer. Since the value remains unconsumed however the 
capital may be transformed, it has the permanence of an in- 
vested fund. Thus, a man who has saved a sum of money may 
have it to-day in the form of wool, to-morrow in the form of 
cloth, and the day after, through selling the cloth and buying 
boots, he may have it in the form of boots. His fund will 



122 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 51. 

have remained unaltered, notwithstanding the variety of forms 
which the wealth represented by it has undergone. 

Fixed capital is being consumed, as well as circulating capi- 
tal. The rates of consumption are, however, very different in 
different cases. Great public buildings may last for centuries. 
A canal, if kept in repair, will last as long as the geological 
conditions of the country through which it passes remain un- 
altered. The buildings of a factory will probably be nearly 
worn out in the course of one generation, and its machinery in 
a few years. Thus, in order to keep up the fixed value of all 
the cotton factories of a state, it is necessary to continually 
spend labor in repairing all of them, and in rebuilding those 
which get worn out. 

Suppose, now, that the business of manufacturing cotton be- 
comes nnrernunerative, while that of trade with foreign coun- 
tries becomes remunerative. Since trading requires ships, the 
prosecution of this remunerative business will require the 
building of ships. Let us imagine that ten manufacturers 
have each been devoting $5000 per annum to repairing and 
keeping up the machinery and buildings of their factories, and 
that without such repairs the machinery would be worn out 
in ten years. They may then say : " It is no longer profitable 
to spend money in keeping up our machinery and our build- 
ings : we had better devote the sum which we have been 
spending in this way to the building of ships." If ships cost- 
ing $50,000 each were the most profitable, the manufacturers 
could, with the money thus withdrawn, build one ship a year. 
This would require a diversion of labor from the work of re- 
pairing factories and machinery to that of ship-building. These 
two kinds of labor being of the same order, the change could 
be effected without any great economic disadvantage. The 
result would be that at the end of ten years the value of the 
factories would all have disappeared, and in its place would 
have appeared ten ships. During the whole process of change 
we conceive that the capital of the manufacturers remains un- 
altered, the diminution of one kind keeping pace with the in- 



11.52.] FLUCTUATIONS IN ECONOMIC PROCESSES. 123 

crease of the other kind, but the practical result would be that 
their factories would have been transformed into ships. 

This particular example of transformation is perhaps the 
most difficult and troublesome, and we have selected it as an 
extreme case. The proposition we wish to enforce is that cap- 
ital may change its form to correspond to any change in the 
direction of industry, provided due time be given to effect the 
transformation. In ordinary cases the transformation can be 
effected simply by no new capital being invested in the less 
profitable enterprises. In a growing country new factories are 
constantly being built and new enterprises undertaken. If any 
manufacture, that of cotton, for example, becomes unprofit- 
able, it is certain that by erecting no new buildings or ma- 
chinery for this manufacture, the proportionate amount of 
capital invested in it will diminish through the new invest- 
ments of capital being diverted to other enterprises. 

52. Inequalities in Economic Processes. The inequali- 
ties described in the preceding section are those which arise 
from changes in the demand for products, some being in de- 
mand at one time, and others at another time. But there are 
also fluctuations which do not arise from this cause alone, but 
which are unavoidable under almost any circumstances. To 
understand them, let us begin by imagining all the opera- 
tions of production, exchange, and consumption to be going 
on with perfect regularity. We have first to show that under 
fixed conditions, that is to say, on condition that the quantity 
of every commodity produced and consumed remains un- 
changed, the transaction of a certain fixed amount of business 
is then necessary. If we trace the processes of manufacture, 
we shall find that the number of exchanges which have to be 
made are dependent upon the circumstances of the case ; that 
to increase them will cause unnecessary waste, and that they 
cannot be diminished without the efficiency of the processes 
being impaired. 

Take for example our old case of the coat. The farmer who 



124 DESCRIPTION- OF TEE SOCIAL ORGANISM. [II. 52. 

shears his sheep has very little knowledge of the location of 
the various factories for making wool into cloth. He cannot, 
therefore, sell directly to the manufacturers without running 
the risk of failure in finding the best market. Quite possibly 
he does not even know how or where he ought to send his 
wool. He therefore sells to some jobber whose business it is 
to know where wool is demanded and at what price. This is 
the first necessary exchange. If this jobber is himself ac- 
quainted with the wants of all the factories, or if the managers 
of the latter know w T here to find him, he will sell to them, 
making another exchange. It may, however, happen that a 
second exchange or even a third is necessary. There may be 
one dealer between the jobbers in the great central markets 
and the farmer, and there may be another between the jobbers 
and the manufacturer. Whether there shall or shall not be 
such "middlemen" is a matter depending upon the knowledge 
of the course of trade possessed by the various parties con- 
cerned, especially by the manufacturer and the farmer. This 
knowledge is one of the conditions which we suppose to remain 
unaltered, and thus the number of exchanges necessary for the 
most advantageous transfer of the wool from the farmer to th-e 
manufacturer are fixed. 

When the manufacturer makes the wool into cloth he finds 
it more convenient to sell to cloth dealers than to the tailors 
who make it into cloth. One reason of this is that each tailor 
wants a great many kinds of cloth, coming from numerous 
manufacturers, while the products of each factory have to be 
divided among innumerable tailors. If then every tailor had 
to get each kind of cloth directly from the factory where it 
w T as produced, there would be a very troublesome number of 
transactions. So wholesale jobbing houses are established to 
purchase various kinds of cloth and sell it to tailors and other 
manufacturers of clothing. Quite possibly great manufacturers 
of clothing may find it to their interest to buy directly from 
the factory. Whether this be so depends upon their knowl- 
edge and upon the conveniences of business, and not upon the 
state of trade. 



11.52.] FLUCTUATIONS IN ECONOMIC PROCESSES. 125 

What is true of the making of wool into a coat is true of 
everything we wear or use about our houses. So as long as 
our means and our wants remain unchanged the population at 
large requires annually a certain definite number of suits of 
clothes, a certain number of houses, a certain number of loaves 
of bread, a certain quantity of beef and pork, and a certain 
supply of furniture. If every one supplied himself with these 
commodities at a uniform rate, or even if the rate were uniform 
for the general average of the community, then there would be 
no disturbance in the course of trade. The quantity of goods 
of every kind which every dealer could sell would be nearly 
the same month after month and year after year. Demand 
would change only with new sources of supply or new uses for 
commodities. 

But the more rapidly society progresses the less is any 
such uniformity possible. The disturbances come from both 
ends of the line: from the consumer and from the producer. 
Some cause may lead a large body of the community to econo- 
mize in the use of clothing. Then there will be a stagnation 
in all the operations of making and selling clothing, or of 
doing anything which is necessary for that purpose. When 
the occasion for such economy arises it is generally practised 
upon all articles of current consumption. When this is the 
case business generally is said to be dull. If some cheap sub- 
stitute for a commodity be found by producers, then all busi- 
ness which consists in exchanging that commodity will be dull. 
Competitors capable of producing cheaper goods engage in 
production and lead to the old producers being no longer able 
to find a market without lowering their prices. They are per- 
haps driven out of business, and thus another perturbation 
occurs through trade having to find new persons for its mana- 
gers. The conception which has now to be formed is this : 

Firstly, we are to imagine a regular stream of commodities 
going through the various processes of production and con- 
sumption. The stream of wool passes from the prairies over 
certain railways, through certain warehouses and factories, and 



126 DESCRIPTION OT THE SOCIAL ORGANISM. [II. 52. 

terminates in the form of clothing. The stream of logs is 
flowing from our northern forest down the Mississippi and 
other rivers, through saw-mills, over railways, and into our 
houses. A stream of cotton is passing from various points in 
the Southern States, flowing into ships and there dividing, one 
portion crossing the Atlantic and another portion finding its 
way to New England factories. A stream of wheat has its 
origin at various points in a large extent of country, flows 
over certain railways and into certain cities, passing into flour- 
ing-mills, flows from them over other railways into bakers' 
shops and into our houses, where it ends in bread. Streams of 
pork are going over nearly the same routes. A stream of hides 
is flowing out of Texas towards our Northern States. 

Secondly, we can imagine a regular and normal state of 
things so that all the streams would flow out at a constant and 
uniform rate. Then the exchanges which they imply would 
be definite in number, and would be invariable except as popu- 
lation, production, and consumption increased at their regular 
rate. 

Thirdly, as a matter of fact they do not flow at a regular rate, 
but rather in a series of waves. Of course an annual wave 
in most original productions of the soil is unavoidable, since 
we have a wheat-crop and a wool-crop but once a year, and 
each at a particular season. But these annual waves are soon 
smoothed off. Other waves rise from changes in the foreign 
demand. All these fluctuations are a necessary incident of 
economic operations, and do not imply anything abnormal in 
the conduct of society. 



II. 53.] THE COMMUNISTIC POINT OF VIEW. 127 



CHAPTER IX. 

PRODUCTION AND CONSUMPTION FKOM A COMMUNISTIC POINT OF 

VIEW. 

53. By a communistic view of economic processes we mean 
a view which includes only the processes themselves in their 
relations to the community at large, considered as a co-opera- 
tive, body, and leaves out of consideration those associated 
features which do not constitute essential parts of the process. 
The reason for this view is that the associated features alluded 
to confuse our thought, and stand in the way of our seeing the 
essential conditions of the problem. 

Let us see what are the conditions essential to the enjoyment 
of a coat. They are the labor devoted to the production and 
transportation of the various materials of which the coat was 
made, their combination into a coat, the transportation of the 
coat to some point within easy reach of the wearer, and the act 
of the latter in going to that point and getting the coat. I say 
these operations are the essential ones. For it is certain that that 
coat could not have been enjoyed by the wearer without these 
processes. And it is equally certain that if these processes are 
all performed, he will have the coat. Now, that without which 
a result will certainly not be, and with which it certainly will 
be, is, in the highest degree, the essential condition of the result. 

Besides these essential operations by which the coat was pro- 
duced and placed in possession of the wearer, there have been 
certain acts of another kind. These acts have consisted in a 
certain number of persons in succession each calling the wool 
" my property " and receiving money from the following per- 
son in exchange for the right on his part to call the wool his 
property, and so with the various materials, and with the 
finished coat, which the wearer had to pay money for. Now, 



128 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 54. 

these acts of exchanging the right of ownership, however nec- 
essary they may be (and they are absolutely necessary as society 
and human nature are constituted), are not parts of those opera- 
tions of production and transformation which we have shown 
to be essential. The fact that we cannot get along without 
ownership and exchange in no manner modifies the fact that if 
the thousands of producers unite in performing all the opera- 
tions necessary to making the coat and putting it into your 
possession, you will have it, and if they do not you wall not 
have it. Now, our object in the present chapter is to leave out 
of consideration the processes of exchange and the rights of 
ownership, in order to show what necessary relations exist 
between the producing operations and the enjoyment of com- 
modities. We call this view communistic, because the word 
communism is used to designate a system in which the private 
ownership of property is not recognized. We view economic 
conditions from this standpoint because it affords us the basis 
of solving a number of economic problems in an easy and sim- 
ple manner which otherwise would be very complex. 

54. We suppose it evident to the reader that the popula- 
tion of the country comprises some fifteen millions of laboring 
units, heads or members of families, who are producing com- 
modities for the benefit of others. Farmers are producing 
wheat and corn ; millers are producing flour ; carpenters and 
bricklayers are producing houses ; actors are producing amuse- 
ment; tailors are producing clothing. If we add up all the 
bread, all the clothing, all the amusements, all the houses, we 
shall have in each case a certain sum total representing the en- 
tire production of each separate commodity by the whole com- 
munity. 

In return for his contributions to this sum total, each pro- 
ducer is getting a larger or smaller share of other sums total for 
his own use. By the process of exchange he gets small quanti- 
ties of a large number of commodities in exchange for a con- 
siderable quantity of some one commodity which he himself 



II. 54.] TEE COMMUNISTIC POINT OF VIEW. 129 

lias produced. His welfare depends on how much of these 
separate commodities his labor will enable him to command. 
The more he puts in the better for the others, and the more 
they put in the better the chance for him to be supplied. 

To fix the ideas, let us suppose that all these things produced 
are brought together into one central reservoir. "We employ 
this conception merely to enable us to think of them as wholes 
rather than as scattered masses of parts. Then, every com- 
modity which is brought into the reservoir will be brought 
in by some person or body of persons, everything will be 
taken out by somebody, and every commodity which is taken 
out will be consumed by some person or family. It is cer- 
tain that nothing can be taken out except what has been 
put in. 

An apparent difficulty may arise in making this conception 
correspond to the actual case. If we add up all the quantities 
of everything actually produced, we find that the greater part 
are taken out, not for the consumption of the individual who 
takes them, but for the purpose of being worked up by him 
and brought back to the reservoir in an improved form. For 
example, the wool which the drover throws into the reservoir 
is taken by the manufacturer, not to be consumed by himself, 
but to be made up into cloth. The tailors take the cloth out 
of the reservoir in order to throw it back again in the shape of 
clothing. But this process need not cause any difficulty. The 
ultimate object of the wool is clothing, and the ultimate object 
of everything is to satisfy the wants of individuals. The only 
consumption with which we are concerned at present is that 
of the commodities withdrawn by the individuals, not to be re- 
turned by them, but to be applied to their own uses. We 
therefore leave the wool and cloth out of consideration, and 
conceive the coat to be brought in, not as the sole contribution 
of the tailor, but as the joint contribution of wool-growers, 
shearers, railway managers, spinners, weavers, merchants, and 
tailors. We may, if we please, imagine a separate central reser- 
voir into which nothing enters but finished houses, furniture, 
9 



130 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 54. 

bread, pictures, clothing, and other articles to be used for the 
support of those who withdraw them. 

The economic welfare of each individual depends upon 
what share of these finished products he has the privilege of 
withdrawing, and upon nothing else. Now, as a first step to- 
wards understanding what causes affect the power of the indi- 
vidual to withdraw commodities from the reservoir, we shall 
have to make a distinction between causes which affect only 
the general welfare and those which affect individuals, or spe- 
cial classes. Everything which increases either the sum total or 
the quality of any commodity brought into the reservoir tends 
to increase the general welfare, because then there is either 
more of that commodity, or a better article, for everybody who 
wants it. If this commodity is one of which there is already an 
ample supply, then the increase to the general welfare will be un- 
important. If it is something of which people stand in great 
need, and of which the supply is small, the increase forms an 
important addition to the general welfare. Moreover, in any 
case, the addition of any commodity will directly benefit only 
those who use that commodity. Now, economics and govern- 
ment policy can concern themselves only with the welfare of 
whole classes of individuals ; and since one class has as good a 
right to their consideration as another, the general welfare is 
that with which they are principally concerned. Hence our first 
conclusion as to whether an economic cause is beneficial or inju- 
rious in its action must depend on whether it tends to increase 
or diminish the general supply of commodities brought into 
the great central reservoir. But as a matter of scientific inter- 
est, it is perfectly allowable and proper to consider how special 
classes and subdivisions of men are affected by economic causes. 

Now, it does not follow, because an increased supply of 
some one commodity is brought into the reservoir, that of 
course everybody who wants that commodity can get more of 
it. It may happen that through the indirect action of the same 
cause a few unfortunate persons may be able to command only 
a smaller supply. We also must recognize the action of eco- 



II. 55.] THE COMMUNISTIC POINT OF VIEW. 131 

noinic causes which, without altering the total quantity brought 
into the reservoir, would result in that quantity being divided 
very differently among separate classes of men. If then we find 
it satisfactorily established that any economic cause will result in 
some class of men (carpenters, for example) being able to get 
a larger supply of commodities, we must see in which of two 
ways this cause acts. If it acts through a larger production 
of those commodities, then it is a public benefit of which 
the carpenters are simply getting a share. But if it is a cause 
which merely enables the carpenters to get something which 
otherwise some one else would have got, then it is merely trans- 
ferring the benefit from one class to another, and is not to be 
regarded as an economic good, unless it can be shown that 
the commodities do more good when consumed by carpenters 
than when consumed by others. 

This classification will enable us to make an important gen- 
eralization. Those industrial and business efforts in which 
every man competes with his fellows by trying to supply a 
better article to his customers than his competitors can supply 
tend to increase the sum total of commodities produced and 
so promote the general good. Those efforts which consist in 
placing restrictions on competition by limiting in any way the 
freedom of everybody to produce as much as he is able can 
only benefit one class at the expense of others. 

55. Let us now see what regulations would have to be es- 
tablished for the public good in the distribution of the sum 
total of products. The reason why regulations are necessary 
is that every one wants to get a share of a great many things, 
and especially of the useful and scarcer things. His welfare 
depends on what he can get, and as a general rule he is a safe 
judge of what he wants. But it is different with the things he 
brings in. These are for other people, and it is necessary for 
the public good that he bring in, not what he likes to produce, 
but what other people want to consume. How shall he be in- 
duced to do this ? 



132 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 55. 

In considering this question we shall assume that there is 
a central authority which can make and enforce what regula- 
tions it pleases. Let us see what would be possible to such an 
authority, and what, from the very nature of things, impossible. 

I. The first regulation which we see to be necessary is that 
no one shall be allowed to draw things out of the reservoir un- 
less he puts in an equivalent of something that somebody wants. 
But what kind of equivalent ? If nothing more than an equiv- 
alent in labor, then everybody would put in what he found it 
easiest to make, and would neglect what he found it difficult 
to make. The result would be that there would be a great 
collection of those things easy to make, and a great scarcity of 
everything else. Since many useful things are hard to make, 
we must require something else than an equivalent in labor of 
production. "We may, at this juncture, be guided by the prin- 
ciple that the quantity of each commodity brought in must, so 
far as possible, be so regulated as to be just equal to the quantity 
wanted to be taken out. But even under the most favorable 
regulations an accumulation of some things and a scarcity of 
others would be unavoidable. 

II. The central authority would then have to remedy this 
inequality. It would perhaps say to the combined farmer and 
miller, " You are bringing in more flour than we possibly can eat, 
while the people cannot find enough good paper to write their 
letters on. Cannot some of you leave off making flour and 
begin the making of paper ? " The answer would naturally be, 
" It is very easy to make flour and very hard to learn how to 
make paper. You must therefore offer us some inducement 
to change." The question would now arise on the part of the 
central authority whether some privilege or advantage must 
be held out to induce the makers of flour to learn how to make 
paper. If the principle is introduced that labor is the only 
measure of value, and that one person must gain no more than 
another, it would be impossible to make the change. Evidently 
the easiest way would be to offer some inducement for making 
paper rather than flour. Thus would arise that inequality in the 



II. 55.] THE COMMUNISTIC POINT OF VIEW. 133 

rights of different contributors to the reservoir which human 
experience in all states of society has shown to be unavoidable. 

III. Having thus established the principle that inducements 
must be held out to secure the manufacture of the scarcer arti- 
cles, the question would arise just how strong the inducement 
would have to be. The public at large would have an interest 
in getting the paper with the smallest possible inducement, 
and the latter ought to be so regulated that there should be an 
exact balance between the benefit from the increased supply 
of paper and the evil of offering a premium to paper-makers. 
This would require some measure of benefit and evil, so that 
the benefit of getting a little more paper, and the corresponding 
evil of paying for its production, would be set off against each 
other. This consideration would lead to the still further devel- 
opment of the plan. 

TV. Every producer who made an addition to the supply of 
plentiful articles would do only a little good, while if he added 
to the supply of the scarcer ones he would do the more good 
the scarcer the article. The person who took away a supply 
of the plentiful articles would do very little evil to his fellows, 
while he who took a supply of the scarcer ones would do more 
and more evil in proportion to their scarcity. Thus would 
arise the idea of a measure of good or evil ; that is, of value. 
The central authority might begin by establishing this measure 
in the case of each commodity. It might say: " Every man 
who brings in a barrel of good flour shall be held to do a good 
of $5 ; and every man who takes away a barrel to do an evil of 
$5. Every man who brings in a ream of paper shall be held 
to do a good of $2 ; and he who takes it out an evil of $2." 
Having established such a scale for every commodity in the 
market, the authority would await the result. The most equi- 
table result would evidently be that every one should be allowed 
to take out a value equal, on the established scale, to that which 
he brought in, and that he should also be allowed to bring in 
what he pleased. If inequalities were still found, some things 
being plenty and others scarce, it would be necessary to con- 



134 DESCBIPTION OF THE SOCIAL ORGANISM. [II. 56. 

tinue adjusting the scale of values ; and the final result should 
be such adjustment of the scale that the quantity of every- 
thing taken out should be just equal to that brought in. 
When . this was done the operations of the imaginary society 
would correspond exactly with those which have grown up 
among us. 

To what in this picture corresponds the case of non-employ- 
ment of laborers ? In our picture every man is at liberty to 
bring in as much or as little as he pleases, but laborers out of 
employment can bring in nothing, and so can acquire no right 
in the store. But what is meant when we say that laborers can 
find no employment? Everybody can find employment on 
some terms. What is generally meant is that they cannot find 
employment at satisfactory wages. Wages being what they 
can buy from the common stock with the proceeds of their la- 
bor, this is simply saying that what they are allowed to take 
out of the reservoir is not, in their opinion, the proper equiva- 
lent of that which they are willing to put in. For this we may 
say that there is no possible remedy so long as every one is at 
liberty to work or stay idle. He must be his own judge of the 
value of his services, and if he values them too highly nobody 
can help it. 

56. The Conditions of General Prosperity. The careful 
thinker will note the general tendency of the preceding con- 
siderations towards one conclusion, namely, that general pros- 
perity is but slightly affected by those measures in which the 
public take the greatest interest, that it can practically vary 
little from year to year, and that it can change but slowly from 
generation to generation. An illustration has already been ad- 
duced showing how illusory the popular estimates of economic 
well-being are apt to be. So accustomed are we to measure 
this well-being by entirely insufficient standards, that it may 
be well to review the subject once more from the standpoint 
of common-sense. 

When is a community, a class, or an individual prosperous ? 



II. 56.] THE COMMUNISTIC POINT OF VIEW. 135 

When they have plenty of money ? No, for the money is of 
no use to them. It may enable them to buy, but it cannot 
do this unless the things they want to buy are first produced. 
Is a man prosperous when his goods and services are in de- 
mand ? Not unless tin's demand will enable him to buy. "When 
lie sells he gives what is valuable, and does not receive a return 
until he buys something. The true answer is that he is eco- 
nomically prosperous when he is able to supply his natural and 
artificial wants without more labor than is conducive to his 
physical health. A class is prosperous when all its members 
enjoy this condition of prosperity ; and when all classes in the 
community enjoy it, then certainly is the community jDrosper- 
ous, no matter how weak and badly off it may be when we 
measure it by the popular standard. Two opposing factors 
therefore come in — the supply or mass of commodities, and 
the labor by which that supply is obtained. 

We have already shown, what indeed ought scarcely to need 
showing to a reasonable being, that, so far as the community 
at large is concerned, a necessary prerequisite to the supply of 
these wants is that all the agencies necessary to that end shall 
be produced. If all the people of the country are comfortably 
housed and supplied with all the food, clothing, furniture, 
books, and other wealth necessary to supply their wants, then 
that country is prosperous. They cannot enjoy this wealth 
unless it is produced: the houses must be built, the grain 
raised, the furniture manufactured, and the clothing made. 
Moreover, if the community is increasing, not only must the 
existing houses be kept in repair, but there must be a continual 
addition to their number. Conversely, if all these things ex- 
ist, that is, if there are enough of houses, furniture, food, 
clothing, for everybody, we may be satisfied that no one will 
be compelled to go without these necessaries. It is indeed 
conceivable that they might all be owned by a few persons, 
and that those few might refuse to let the majority have any 
share of them. Practically, however, this is out of the ques- 
tion. No matter how rich and fortunate he may be, a man 



136 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 56. 

can eat only a certain small quantity of bread, and lie lias 
not the slightest occasion for taking more than that quantity 
from the common store. Therefore he can have no motive 
for keeping anybody else from eating his share of the bread. 
He can only live in one house, and if he has more houses 
than that one he will be practically forced to let other people 
occupy them on such terms as they choose to make. He 
may own a ship, but if this ship could bring nothing but what 
he wanted for his own personal use he would burn her up. 
He bought or built her in order that she might bring things 
for other people. We may therefore lay it down as a practical 
rule, taking human nature as it is, that when a community as 
a whole is amply supplied, no industrious and well-behaved 
member of that community is likely to be in serious permanent 
want. Thus we are led to our second factor, the conditions of 
production. 

It is equally evident that producing power is the necessary 
and sufficient condition that the wealth just shown to be re- 
quired for prosperity shall exist. So long as the community 
possesses the necessary land and minerals, so long as it has fac- 
tories, mills, and mines all in good working order, so long as 
its railways continue to run, and its laborers and merchants 
maintain their skill and good morals, so long will the neces- 
saries of life be produced. The producing power can be im- 
paired only by moral or physical causes acting upon the com- 
munity at large. Of course, every cause which impairs con- 
fidence between man and man, or which leads one to doubt 
whether he will be compensated for his services ; every cause 
which prevents producers from working, and every cause 
which cuts off the supply of material for them to work with, 
tends to diminish production. Hence the question of national 
prosperity resolves itself almost entirely into that of the 
stimulus to production. 

This chapter is, more than any other one, the starting-point 
in the system of economic investigation which will be em- 
ployed in subsequent parts of the present work. 



11.57.] CHANGES WITH THE ADVANCE OF SOCIETY. 137 



CHAPTER X. 

CHANGES IN THE SOCIAL OKGANISM WITH THE ADVANCE OF 

SOCIETY. 

5*7. We may readily imagine the arts of production to re- 
main stationary for long periods of time. Economics would 
then be reduced to a system in which it would not be necessary 
to consider progressive changes of any kind. Such, however, 
is not the case with our generation. We recognize two great 
forms of change : the one common to the whole civilized world, 
the other confined to particular countries. In the first class we 
comprise all those improvements in capital and in knowledge 
which lead to a constant increase or improvement in the pro- 
ducts of labor. Tlo a very great extent, increase of capital and 
increase of knowledge go hand in hand. The reason of this is 
that when we learn some new and better way of producing a 
given article, it is generally necessary to produce a new form 
of capital in order to utilize the discovery. To take a familiar 
example, when the compound engine was invented, the owners 
of Atlantic steamers, in order to utilize it, had to remove their 
old engines and put in new ones of the improved pattern. 

Our knowledge of the best way of producing things is con- 
stantly increasing so rapidly that there is no immediate prospect 
of its reaching a stationary condition. Yet it would seem that 
it must ultimately approach such a condition, though it is diffi- 
cult to say how many generations or how many centuries may 
be required. If we look closely into the matter, we see that 
the causes of progress form a very widely extended class. They 
include not merely improvements made and applied within any 
one country, but knowledge of the wants and capacities of 
foreign countries, and the results of that experience which is 
gradually teaching us the best way of doing many things. 
Such results tend gradually to embody . themselves in fixed 



138 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 57. 

habits. We readily perceive that the system by which the 
body of farmers on the prairies of the West exchange goods 
with various countries in Europe, Asia, and South America is 
exceedingly intricate in its details. Its successful operation 
depends upon the proper co-ordination of the efforts of manu- 
facturers, merchants, ship-owners, and managers of railways. 
There being little real concert of action among these widely 
separated individuals, the co-ordination of their work is a mat- 
ter of slowly growing habit. 

Thus we may see that the commercial supremacy of New 
York is entirely a result of habit and of convenience. Men 
from all parts of the country send there to buy their goods, 
because they know that they can make a better selection and be 
more likely to find exactly what they want there than they can 
anywhere else. The very fact that so many kinds of people are 
thus led to going thither makes it pay the merchants of that 
place to supply themselves with every possible kind of goods 
to meet the demand. It does not pay the merchants of Boston 
to keep on hand so large a supply of everything the people 
want as is found in New York, because the people of the in- 
terior would not find it out, and are not in the habit of going 
in such great numbers to Boston to buy. The result is a 
tendency in the great movements of commerce of all countries 
to concentrate themselves along certain lines and in certain 
cities. The only limit to this concentration is the physical im- 
possibility of handling more than a limited amount of goods 
within the limited space occupied by any one city. 

In the same class of causes we must include the opening up 
of new sources of supply in distant and uncivilized countries. 
The great Asiatic countries, especially China and Japan, are 
gradually coming into communication with the rest of the world, 
and the resources of Africa are rapidly being discovered and 
opened out. Thus there is a gradual tendency towards a state 
of things in which every part of the world will supply every 
other part with the goods which it can make to the greatest 
advantage. 



n. 58.] CHANGES WITH THE ADVANCE OF SOCIETY. 139 

58. In the United States, besides this improvement in capi- 
tal and methods of production, we have had a change due to 
the increase of population. This increase is productive both 
of advantages and disadvantages to the organism as a whole. 
The disadvantage is the continual diminution in the supply of 
the natural agents of production which can be commanded by 
each individual. The larger the population the less land each 
individual must draw his subsistence from. Of course until 
population reaches a certain density this diminution is not felt. 
No one needs more land than, with the least amount of labor, 
will yield him the food, cotton, tobacco, cattle, and timber nec- 
essary for his use. So long as the population is not dense enough 
to encroach upon this minimum, so long no disadvantage is 
felt. But when the individual has to raise his subsistence from 
a smaller surface of soil, he is obliged to introduce improved 
methods of cultivation, and to limit himself in the enjoyment 
of those products of the soil which require the cultivation of 
extended areas. Thus the denser the population becomes the 
more capital and labor it will be necessary to devote to sub- 
sistence, and the more liable the poorer members will be to 
suffer from privation. 

The advantages of a dense population are obvious and numer- 
ous. The social attractions of great cities are powerful eco- 
nomic causes tending to bring men together in them. But the 
great advantage of a dense population in production arises from 
the increased facility with which closely associated men can 
co-operate in production. In a widely scattered population the 
division and organization of labor on a great scale are impos- 
sible, because these require large bodies of men to work to- 
gether. The greater the number of such bodies of men the 
greater the variety of articles which can be made within con- 
venient reach for the use of the whole community. 

"We must also notice that the result of improvements in pro- 
duction is not merely that each individual secures a larger 
supply of the necessaries of life, but that he gets those supplies 
of better quality and in a larger variety of forms, and therefore 



140 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 59. 

can better suit liis taste and peculiarities. The farmer of to-day 
does not eat any more than his predecessor did a hundred years 
ago, nor does the rich man of to-day necessarily eat more than 
the poor man. But the modern farmer has better food than 
the farmer of a hundred years ago had, and the man of wealth 
has a greater variety of food than the poor man. We have 
not many more chairs in our houses now than our forefathers 
had, but they are a different kind of chair. Our watches and 
clocks are more numerous, and we have many more books and 
pictures. Altogether we devote nearly as much labor to pro- 
duction as they did, but we get far more variety and better 
results from it. 

59. Looking at the matter more closely, we perceive that 
these improvements in production involve a change in the rela- 
tive proportions of men engaged in various classes of employ- 
ments. The reason of this is that great improvements are 
confined to certain kinds of production. As one extreme case 
we may take the building of a brick house. We are scarcely 
able to do this to any better advantage than our ancestors. 
We have indeed learned to use machinery in moulding bricks, 
and in the case of large buildings we employ steam hoisting- 
apparatus to raise the materials as the walls go up. But, leaving 
out these comparatively small improvements, the labor of mak- 
ing the necessary material and erecting the walls is almost the 
same that it has been for thousands of years. 

Improvements in agriculture may be considered as interme- 
diate between the two extremes. By the use of sowing and 
harvesting machinery, and by improvements in methods of 
cultivation, we are enabled to secure our supply of agricultural 
products with only a fraction of the labor necessary a few gen- 
erations ago. But the labor necessary to care for the crop and 
take it to market cannot be greatly diminished. 

The extreme cases of improvement are those already de- 
scribed. They consist principally in the making by machinery, 
on a large scale, of what was formerly done entirely by hand. 



11.61.] CHANGES WITH TUB ADVANCE OF SOCIETY. 141 

The spinning and weaving of cotton, the making of watches, 
the sewing of shirts, and the printing of books and newspapers 
may be taken as cases in point. 

60. One result of such improvements is a continual increase 
in the ratio of the urban to the rural population. Since it is 
absolutely necessary that men shall live on the farms which 
they cultivate, an agricultural city is an impossibility. Hence 
we must always have, besides the dwellers in cities, a certain 
population scattered over the country. But the labor of this 
population is more and more confined to the management of 
the rude products of the soil. The grain once harvested, the 
cotton once gathered, and the cattle once killed, everything 
that follows can be more advantageously done by large co-oper- 
ating bodies of men. Such bodies are most easily collected in 
towns and villages. Hence, as improvements go on, a con- 
tinually larger proportion of the population is found congre- 
gated in the cities. "We may see this by studying our Census 
reports. We find that not only does each individual city in- 
crease in about the same ratio as the entire population, but new 
cities are continually arising. 

61. A general characteristic of social progress, the enuncia- 
tion of which is due to Herbert Spencer, will give us aluminous 
and comprehensive view of the subject. Progress consists in 
two continuous and connected processes, the one called differ- 
entiation or specialization, the other integration. 

The former term expresses the fact that individual men 
become different from their fellow-men by the acquisition of 
special powers or faculties. The denser the population, and 
the more refined the special kinds of skill found among partic- 
ular men, the more numerous the men who can do some useful 
thing better than any of their fellows. In a primitive state of 
society there are very few trades. As society increases men 
differentiate themselves more and more by following more 
numerous and specialized occupations. The extremes of differ- 



143 DESCRIPTION OF THE SOCIAL ORGANISM. 

entiation are approached when a man devotes himself to mak- 
ing some one part of a watch, or when, as in Switzerland, a 
manufacturing firm is devoted to making a particular kind of 
hands for a watch. 

This process of differentiation necessarily implies that each 
individual must come into closer and more important relations 
with a continually increasing number of his fellow-men. The 
watchmaker of old needed but few customers. But the man 
who does nothing but make the hands of a watch must have a 
great number. Thus, as differentiation goes on, every part of 
the social organism becomes more closely connected with every 
other part. This increasing adaptation of the parts of the 
organism is called integration. 

QUESTIONS. 

1. Describe as fully as you can the natural requisites of production nec- 
essary in the erection of a house. 

2. Can you give any examples additional to those of § 20 showing 
that knowledge pursued with the object of gain is not generally productive 
of results useful to mankind at large? 

3. Can you give any reason why the owner of land should have the 
exclusive use of any water-power which may be obtained from a stream 
flowing through his premises? 

4. What food is necessarily consumed in the production of a coat? 

5. If a farmer is induced to invest in a steam-plough, what will be the 
debit and credit side of his account? 

6. In what cases should we regard a carriage as capital, and in what cases 
as sustenance? 

7. When we speak of a negative capitalist, is it the capital itself or his 
property in capital which is negative? 

8. To what extent should a theatre be regarded as capital? If you regard 
it as capital with respect to the owner, but not as capital with respect to the 
country at large, then who are the negative capitalists and what is the in- 
terest which they pay on that negative capital? (Note that the essential 
mark of a negative capitalist is that he is paying interest on some fund 
which he is not using as capital, but is enjoying as sustenance.) 

9. Show that the negative capitalist must pay interest instead of receiving 
it. Is every one who pays interest necessarily a negative capitalist to that 
extent? If so, give as many examples as you can of negative capitalists. 



QUESTIONS. 143 

How is it "with a man who borrows money to expend in stocking his farm ? 
Is his capital positive, negative, or zero? 

10. If we should compare the population of New York and of Switzer- 
land with respect to the ratio of the laboring units to the total population, 
would you expect the ratio to be nearly the same in the two countries? In 
which country would you consider it to be the greater? How would the 
ratio in this country a century ago compare with the present ratio? 

11. Can a national loan add to the capital of a country? 

12. "If there are human beings capable of work, and food to feed them, 
they may always be employed in producing something." Can they neces- 
sarily produce the equivalent of the food they consume? If not necessarily, 
under what conditions can they? Take, as a starting-point, the state of 
things if the fixed capital of a country were all destroyed, but the suste- 
nance all preserved. 

13. Is there any inherent necessity that wealth should be consumed in 
order to perform the functions of capital — e.g., if a machine could be made 
which would run forever without wear, would it lack any essential prop- 
erty of capital? 

14. In 1871 a large part of the city of Chicago was destroyed by fire. 
Could the people of the city have rebuilt it without outside help? If not, 
point out the nature of the help rendered from outside. 

15. Point out the influence of steam-transportation upon the ratio of the 
urban to the rural population. 

16. How does the modern system of production by large organizations 
operate upon the shiftless class who will never stick to a regular line of 
work? Show why, when this class really wants to work, it is harder to 
get it than it would be in a primitive community. 

17. Do fidelity and reliability on the part of the common laborer be- 
come more or less necessary with the progress of society? 

18. "What reasons can you give for considering that, other conditions 
being equal, that country is best off in which the ratio of the laboring units 
to the whole population is the least? Granting the relation, which term is 
cause and which effect? That is, is the country well off in consequence of 
the small number of laboring units, or is this number small because of the 
prosperity? 

19. To what extent is a contractor engaged in building houses a laborer, 
and to what extend a capitalist? What form does his capital take? Is it 
necessary that he should have any capital at all, and if so, why? 

20. Enumerate so far as you are able the various classes of men who re- 
ceive wages in the widest economic sense. If you begin with those highest 
in rank, who would come first? 



144 DESCRIPTION OF THE SOCIAL ORGANISM. 

21. Enumerate, so far as you are able, those classes of persons working 
for hire whom you would put into Walker's third class, and those whom 
you would put into the fourth class. 

22. Can you see any difficulties in the way of abolishing all wages by 
time and paying laborers by the piece? If so, enumerate them. 

23. If the organization of labor described in § 36 were carried to the 
highest degree, describe the result so far as you are able. 

24. Can you explain why the co operative system, under which the opera- 
tives dispense with master-workmen and managers to run the factory, and 
make the shoes themselves, and thus get the whole price, has not been more 
successful? 

25. Define what portion of the price paid for a coat goes to compensate 
the friction of exchange. 

26. Explain as well as you can in what manner the checks upon the 
increase of population will act when the population begins to encroach 
upon the means of subsistence. 

27. What is the effect of encroachment on the means of subsistence 
upon the efficiency of labor (§ 41)? 

28. Does the proportion of the population engaged in intellectual pur- 
suits tend to increase or diminish with the increase of wealth? 

29. How do you reconcile the rapid growth of population in civilized 
countries during the present century with the Malthusian theory? 

30. Is there any method of calculation by which we can approximate to 
the total population which the earth can sustain? If so, state the method, 
and show what data are necessary to apply it. 

31. Has cheap transportation of passengers and goods across the ocean 
tended to retard or to stimulate emigration? 



II. 62.] OF MONET. 145 



Division C— The Mechanism of Exchange. 



CHAPTER XI. 

OF MONEY. 



62. The necessity of exchange arises from the division of 
labor. If there were no such division, then every man would 
make all things necessary for human wants, and hence might 
supply all his own wants. He would then not need to exchange 
with other persons. But, in the actual state of society, each 
producer generally makes a large quantity of some one com- 
modity, and in order to supply his wants he must exchange this 
commodity for a great number of other commodities. 

We have already defined two possible systems on which this 
exchange might be effected, the one barter, the other sale. By 
the method of barter the exchange of one quantity for another 
would be made by a mutual transfer of the ownership of the 
commodities exchanged. We have shown how impossible such 
a system would be in civilized society, and how by the intro- 
duction of a common medium of exchange, called money, the 
difficulties in the way of barter are avoided. 

But. to understand correctly the theory of exchange it must 
be remembered that its ultimate result is, after all, barter, in 
that commodities are ultimately exchanged for commodities. 
To show this, let us suppose the owner of a pair of shoes to sell 
them, and with the money to buy a barrel of flour. In doing 
this he has made two exchanges, selling the shoes for the money 
and buying the flour with the money. But so far as he is con- 
cerned, all he has done and all he wanted to do is to exchange 
his shoes for the flour. The money was only an intermediate 

10 



146 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 62. 

ao-ent which enabled him to effect this exchange. This is why 
money is called the medium of exchange. 

The function of money in leading to what is equivalent to 
barter, and the nature of the exchanges which are actually 
made in the social organism, can be most clearly apprehended 
by referring to the communistic view of the operations of the 
organism which has been set forth in Chapter IX. 

We there introduced the conception of each producer bring- 
in <r Lis product to a central point, and depositing it in a com- 
mon stock for the benefit of other men. In return for this he 
is permitted to take from the common stock such equivalent 
of the products of other men as he desires. We have shown 
how difficult and complex would be the problem of deciding 
how much of any commodity he should be allowed to take from 
the common stock in exchange for what he brought into it. 
By the use of money this requirement is fulfilled in a wonder- 
ful manner, and the most complex problem which could be 
presented to the central authority is solved at once without 
serious trouble to anybody. The benefit conferred by bringing 
wealth in and the evil caused by withdrawing it are measured 
by the money received and paid. For example, considering 
a shoemaker in his relations to society at large, that is, to 
all other individuals of the community, we see that when he 
sells a pair of shoes he puts them into the common stock for 
the benefit of other people. The measure of this benefit was 
the money that he received for them, and the possession of 
this money was his certificate that he had rendered the benefit. 
When he bought flour with the money he surrendered this 
certificate and took a barrel of flour from the common stock. 
His right to draw from the common stock on account of his 
shoes then terminated. In consideration of giving other people 
a pair of shoes other people gave him a barrel of flour. 

Our next questions will be what commodities can be used 
as money; and what requirements these commodities must ful- 
fil in order to perform the functions of money in the most ad- 
vantageous manner. 



II. 63.] OF MONET. 147 

63. Requirements of the Medium of Exchange. From 
what lias already been said we see that all civilized communi- 
ties are in need of some common commodity called money for 
which all other commodities shall be exchanged. We also call 
to mind that exchange consists in a mutual transfer of owner- 
ship, the ownership of the goods passing from the seller to the 
buyer, and that of the money in the reverse direction. We have 
now to examine what requirements money should fulfil. 

First Requirement. It must have value. To see the rea- 
son for this requirement, let us take the case of a man who 
agrees to work one month for the sum of $30. If his employer 
could agree beforehand that this $30 should purchase for him 
a certain amount of clothing, flour, and other necessaries, it 
would make little difference to him whether it had or had not 
value. But no such guarantee is possible. The employe can 
buy with his money only as much as it has the power to com- 
mand from the dealer, the shoemaker, the grocer, and the other 
persons who are to supply his needs. Moreover, the commodi- 
ties he can thus buy measure what his money is really worth 
to him. Let us suppose that he wants to have a pair of shoes 
made. It is very clear that if the shoemaker can get money 
without going to the trouble of making shoes, he is not going 
to make shoes for the laborer for the sake of the money. The 
same is true of every one who supplies the laborer's wants. 
Hence it is clear, if the latter is not to be deceived, that the 
money which he receives must be something which the grocer, 
the shoemaker, and the tailor cannot get except by working 
for it as he himself does. It must also be desired by them, 
because of course they will not work for what they do not 
desire. 

Thus three necessary qualities of money are (1) that it must 
be desirable, (2) limited in supply, and (3) incapable of being 
commanded except by labor. These elements, as we shall 
hereafter see, determine value. The somewhat vague yet ex- 
cellent term purchasing power is applied to the power pos- 
sessed by money to command commodities. We may then say 



148 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 64. 

that the purchasing power of money is the measure of its value 
to the person who possesses it. 

Secondly. The value of money must he definite and per- 
manent. If the commodity used as money is something of 
which either the desirability or the quantity at hand fluctuates 
widely from week to week, then the seller, laborer, or other 
receiver of money can never know beforehand what quantity 
of the necessaries of life the money which he is getting will 
purchase for him. It may possibly be weeks, months, or years 
before he will want to expend the money for the necessaries of 
life ; but he wants a reasonable assurance that when he does 
expend it it will buy as much as it would when he gets it. This 
constancy of purchasing power implies constancy of value, and 
therefore a general constancy in the conditions of supply. 

Thirdly. Money must possess durability. If it is liable 
to wear out or deteriorate as it passes from hand to hand, it 
speedily disappears and no person could with safety keep it for 
a long time. To avoid this difficulty it must be something 
which is as durable as possible. 

Fourthly. It must admit of convenient subdivision. Of 
the vast multitude of commodities or services necessary to sup- 
ply human wants, some have to be bought in small and others 
in large quantities. Thus payments of various amounts have 
to be made, which cannot be done unless the money by which 
they are made can be divided up to any extent. 

Fifthly. It must he something which can readily he trans- 
ported from place to place, and thus he at convenient command 
of the owner. This needs neither illustration nor proof. 

64. The commodities which most nearly fulfil all the pre- 
ceding conditions are the precious metals, gold and silver. 
These metals have therefore long formed the universal medium 
of exchange among civilized nations, with some exceptions 
which will be considered from time to time. Yet it cannot be 
claimed that they absolutely fulfil any of the above require- 
ments. All we can say is that they come nearer to the fulfil- 



II. 65.] OF MONEY. 149 

merit than any other commodities with which we are ac- 
quainted. 

Other commodities have been temporarily used by people 
who could not readily command the precious metals. Among 
tribes engaged principally in the chase, furs and skins have 
been employed as money. These formed the medium of ex- 
change between the Hudson Bay Company and the Indians. 
Among pastoral tribes sheep and cattle have frequently been 
used. In the early history of the American colonists wampum 
was the medium of exchange with the Indian tribes. When 
the metals have come into use, it is not always gold or silver 
that is first employed. Platinum coins were once in use in 
Eussia. The smallest coins of Europe are made of copper, 
although it is gradually giving way to the alloys of nickel, out 
of which our small coins are made. We might not inappro- 
priately include in this class an irregular kind of money, the 
paper notes sometimes issued by governments in dire distress. 
But although these notes are intended for use as money, they 
generally purport to be promises to pay money, and not the 
money itself. It will hereafter be shown how and under what 
conditions such promises can take the place and fulfil the func- 
tions of money. 

65. Methods in which the Precious Metals are utilized 
as Money. When one sells a commodity, it is essential that 
he shall know how much money he is getting in exchange; 
hence arises the necessity of measuring money. In the early 
stages of society the money is measured by its weight', men 
sell for so many pounds or ounces of gold or silver. This seems 
to have been the case in ancient times. We read of the pieces 
of silver with which Abraham bought land. So, after the gold 
discoveries in California, payments were made in mining com- 
munities by weighing gold-dust. But the weighing of all 
money paid is too troublesome in ordinary transactions, to say 
nothing of the difficulty of insuring the fineness or purity of 
the metal. Hence, from an early age of the world's history, 



150 DESCRIPTION OF THE SOCIAL ORG AUTISM. [11.66. 

governments have adopted the policy of coining the precious 
metals into pieces of definite weight. Such pieces of metal 
are now universally used in domestic transactions. Thus we 
have certain weights of gold in England, France, and America 
known respectively as pounds, francs, and dollars. 

The way in which money gets into circulation is ordinarily 
this : When any possessor of gold or silver desires to use it in 
purchasing commodities he sends it to a mint. The mint is a 
kind of factory established by the government for purifying 
the precious metals and making them into coins. At the mint 
the government makes the gold and silver bullion brought to 
it into coins, and returns it to the owner in the form of money. 
Some governments coin all the bullion brought to them free 
of charge, while others demand a small percentage for the ex- 
pense of the operation. As a general rule, however, the charge 
is so small as not to be a very important item in the value of 
the money. 

66. The reason for governments undertaking the coinage 
of money is that, if the coinage is honestly executed, it affords 
the best assurance that the coin is what it professes to be. If 
individuals or corporations were allowed to issue money, the 
question would be constantly arising whether any particular 
coin did or did not contain the requisite amount of metal. But 
when a government coins, the weight and quality of the metal 
in the coin is fixed by law. Each nation determines for itself 
what amount of metal shall be contained in a given coin. If 
we compare the moneys of England, France, and America, we 
find the fundamental units to be entirely different. The Eng- 
lish pound contains nearly as much gold as five American 
dollars, and one American dollar contains more than five 
francs. But it is essential that whatever coin is issued under 
a given name shall be as invariable as possible from generation 
to generation. Otherwise we have changes in the meaning of 
the word " pound," " dollar," or " franc," which would be in- 
tolerable. 



II. 67.] OF MONET. 151 

When a government undertakes to coin money, its first step is 
to prescribe how much gold or silver shall be put into a coin, and 
to give that coin a name. The name should then indicate the 
quantity of the metal of which the coin consists. Some econo- 
mists have objected to giving special names to the coins, be- 
cause these names impress the ignorant public with the idea 
that some element of value resides in the name itself. For ex- 
ample, all ignorant people who do not possess unusually good 
sense think that a dollar has some peculiar element of value 
which does not reside in twenty-six grains of ordinary gold. 
Hence it might have been better to designate coins simply 
by their weight, as so many grains or grams of gold or silver. 
But it is questionable whether the superstition would have 
been done away with by any system of naming. The English 
pound was not originally the name of the coin, but meant a 
pound of silver. But this did not prevent more than one king 
from making a coin which contained less than a pound of sil- 
ver and calling it a pound. At the present time no one ever 
thinks of any relation between the pound sterling and the 
pound weight. 

67. Legal-tender Quality of Money. As a general rule 
the great body of the coined money of each nation is a legal 
tender for all payments made under its laws. It is very essen- 
tial to clearly understand how the necessity of making money 
legal tender arises. It arises because men must have some 
common understanding as to what shall be meant when one 
person agrees to pay another a specified sum of money. We 
can readily imagine that if there were no such understanding, 
disputes might arise as to what sort of dollars or cents or cur- 
rency a party had agreed to pay. Such disputes would be 
especially liable to arise when, as is always the case, substitutes 
for the precious metals are used as money. They are avoided 
by a legal provision that when a person agrees to pay a sum of 
money within the jurisdiction of any country, the agreement 
shall be construed to refer to the coin issued from the estab- 



152 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 67. 

lislied mints of that country. Money with which this right is 
associated is called a legal tender. 

The legal tender of a given kind of coin may be limited or 
unlimited. It is limited when the legal understanding is 
that payments can be made by it only to a certain amount ; 
unlimited when there is no such legal understanding. Some 
of our small silver coins, for example, are a legal tender to the 
amount of $1, and others to the amount of $5 or $10. The 
largest and most important coins are a legal tender to any 
amount. The effect of the limit is this: No creditor is com- 
pelled to accept payment and give the debtor a release if the 
coin is not a legal tender to the amount of the debt, but may 
require payment in coin which is a tender to the full amount. 

The power of making particular kinds of money a legal 
tender is so easily abused that its nature and effect should be 
well understood. "When properly used it has no other effect 
than that of establishing the meaning of words. As it is nec- 
essary that there should be a common understanding as to what 
shall be meant by " one foot," "one acre," or "one gallon," so 
a similar understanding is necessary as to the meaning of "one 
dollar." As the law prescribes that "one pound" shall mean 
a particular weight, so it prescribes that the word " one dollar " 
shall mean a certain coin issued from some United States mint. 
During the Civil War, however, Congress went farther and 
enacted that certain paper notes issued by the government 
should be a legal tender. This was changing the meaning of 
words, because the word dollar, which before meant a piece of 
gold, now meant a piece of paper. Had this change applied 
only to agreements made after the law was enacted, it would 
not have been morally wrong. But some courts decided that 
it should apply to all previous contracts, in one case even to an 
expressed contract for the payment of gold coin. This decision 
was as wrong as if Congress had changed the size of the bushel 
measure and the courts had decided that old contracts for the 
delivery of wheat must be made in the new measure, and not 
in that understood by the parties when they made the contract. 



II. 68.] OF MONET. 153 

68. The Monometallic and Bimetallic Systems. In some 
cases only one of the precious metals is made into coins of un- 
limited tender. Thus in England and Germany all large pay- 
ments can be required by the creditor to be made in gold coin. 
Among oriental nations, especially India, China, and Japan, 
silver has very generally been the only unlimited legal money. 

The system of making but one of the precious metals an 
unlimited tender is called monometallism. 

The system of making both gold and silver coins an unlim- 
ited tender under the same jurisdiction is called bimetallism. 

Under the bimetallic system the debtor has the right to make 
his payment at choice in either of the two precious metals, no 
matter how great the amount may be. This system prevails 
with some modification among most European nations except 
England and Germany, but with certain limitations which will 
hereafter be discussed. In the United States sometimes one 
and sometimes the other system has prevailed. At the present 
time we have a modified form of bimetallism, which will be 
described subsequently. 

The system of pure, or unlimited, bimetallism is as follows : 
The government first assumes that the values of equal weights 
of the two precious metals have a certain fixed ratio to each 
other. During the first seventy years of the present century 
the value of an ounce of gold in the markets of the world was 
generally nearly equal to that of 15^ ounces of silver. Only 
on rare occasions did it fall below 15 or rise above 16. Hence 
France chose 15£ as her ratio. Since 1834 the ratio adopted 
by the United States has been 16. The number thus estab- 
lished is called the monetary ratio. 

It must be understood that this does not mean the actual 
ratio in the markets of the world, but is an arbitrary number, 
chosen by the legislative authorities so as to be as near as pos- 
sible to what they supposed would be the market ratio. 

Having fixed the ratio, and prescribed the weight of pure 
metal in each coin in accordance with it, the mint coins all the 
bullion of either metal brought to it into coins of unlimited 



154 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 69. 

legal tender. At the present time tlie United States gold dol- 
lar contains 23.22 grains of pure gold, while the silver one con- 
tains 371.25 grains of pure silver. The coins, however, also 
contain ten per cent of alloy, so that the actual weights are : 

The gold dollar 25.8 grains. 

The silver dollar 412.5 grains. 

The three essential features of unlimited bimetallism are : 

I. That the law recognizes no difference between the values 
of its gold and silver coins. 

II. The mint must coin into dollars all of each kind of 
metal which is brought to it. 

III. Each metal being an unlimited tender, a debtor may 
pay his debt in the one he chooses. 

Difficulties have been found in making a scheme involving 
all these features work satisfactorily. Hence they have been 
modified in various ways. 

69. Limited J3imetattis?n. Between the years 1873 and 
1878 the ratio of the market value of gold to that of silver took 
an extraordinary rise, and has for several years past not differed 
much on the average from 18. The result has been to throw 
the monetary systems of those nations practising bimetallism 
into confusion. The system temporarily adopted by these 
nations is that of restricting the coinage of silver, while plac- 
ing no limit upon that of gold. This restriction applies only 
to the quantity coined, and not to the legal-tender quality of 
the silver coins. That is, a debtor can pay a debt of any 
amount in silver coins if he can find them, but the mint will 
not coin them for him. At present the mints of the United 
States are required to coin not less than two millions nor more 
than four millions of silver dollars monthly. But, for reasons 
which cannot be well understood at present, the government 
does not coin these dollars for the owners of the bullion, but 
buys the bullion, coins it on its own account, and pays these 
coins out to the public creditors. 



II. 70.] OF MONEY. 155 

At the time of sending this book to press the whole ques- 
tion of coinage throughout the world is in an uncertain and 
confused state, owing principally to the extraordinary change 
in the relative market values of gold and silver which has 
just been described, and owing also to the increasing amount 
of money needed to transact the great volume of business 
to which modern production has given rise. The desirable- 
ness of an international system of coinage is widely recog- 
nized, but the people of no one nation are fully agreed as to 
what is the best system even for themselves, and of course an 
international arrangement involves yet greater difficulties. 

70. Subsidiary Coinage. The system of monometallism 
does not imply that gold coin alone shall be used, but only that 
no other coin shall be an unlimited tender. Small payments 
must always be made in coins of other substances, because gold 
coins of small value would be so minute as to be liable to loss. 
Hence all governments issue coins of small value, which are 
made a limited legal tender, and are called subsidiary coins. 
The metals most used in these subsidiary coins are silver, 
nickel, and copper. To prevent them from being melted 
down as bullion, they contain less than their nominal value of 
metal. Thus our silver quarter dollar weighs only 96 grains 
instead of 103 grains, which last would be one fourth the 
weight of the silver dollar. 

If the coinage of this subsidiary money were free, like that 
of gold, every one who got his silver coined into quarter dol- 
lars would receive in coined money a greater nominal value 
than that of the bullion from which the coin was made. 
Hence the practice is similar to that adopted in the case of our 
silver dollar: the government buys the silver bullion for its 
small coins, makes them into coins of the prescribed denomi- 
nations, and offers these coins in exchange for those of unlim- 
ited legal tender, at their face values. The result is that the 
public take what are wanted for small payments, and no more. 



156 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 71. 

71. Volume of the Currency. By currency is ordinarily 
meant money or some substitute for money in actual circula- 
tion from hand to hand. One of the most important mathe- 
matical conceptions which enter into economics is that of the 
total volume of the currency. We may reach it in various 
ways which are nearly equivalent to each other. Assuming, as 
we may, that the quantity of coin more than fifty years old 
actually in circulation is insignificant in amount, we may add 
up the value of all the coins issued from the United States mint 
during the last half-century. We shall thus have a sum total 
from which all the coined money now in circulation must have 
come. If we subtract from this sum total all the coin that has 
been melted down, all that is now in foreign countries, and all 
that is lying idle in the vaults of the banks or of the Treasury, 
we shall have a balance showing the coin in circulation. This 
balance is the volume of the currency so far as coin is conr 
cerned. 

But we may commence at the other end of the line by con- 
sidering the money which is in every man's pocket. If we 
could at midnight on any day demand and obtain from every 
individual and corporation in the country a statement of the 
amount of coin money in actual possession of such person, we 
should have a definite sum total. It is evident that this sum 
total would change very slowly from day to day, and even 
from year to year. The only effect of payments would be that 
one man would have a great deal more and another man a 
great deal less on different days. Only when money was 
melted down, sent out of the country, or stored away in vaults, 
or as new coin was issued, would there be changes in the sum 
total. 



II. 72.] BANES AND CREDIT-MONEY. 157 



CHAPTER XII. 

BANKS AND CKEDIT-HONEY. 

72. We suppose the reader to have clearly iri mind what 
has been said in §§ 4-6 on the relation of wealth to its owner. 
When we study the operations of business we see that although 
in most cases the wealth one possesses is a definite existing 
object, such as a house, a table, or a field of wheat, yet in 
other cases the wealth is not definite. For example, I agree 
with a cabinet-maker that he shall make me a table and de- 
liver it next week. I may then consider myself in a certain 
sense the owner of that table, although it has no existence and 
may possibly never come into existence. Again, in the sale 
of commodities in the market, it rarely happens that pay- 
ment is made at the time of the sale. In this case what the 
seller receives for his commodity is not money, but the right 
to demand money at some future time. But he considers him- 
self the owner of that much money as completely as if he had 
it in his safe, and, for economic purposes, we may consider this 
imaginary money, which he is to get at some future time, as a 
part of his wealth. Legally, however, the creditor is con- 
sidered, not as the owner of wealth, but as the possessor of a 
right, namely, the right to demand from his debtor the pay- 
ment of the money, and to enforce this payment by legal 
measures. This right to require the payment of money from 
another person is called credit. 

To prevent confusion we must carefully distinguish this 
meaning of the word credit from the analogous and common 
meaning of good business standing. When we say, " That 
man's credit is good," we use the word in a different sense 
from the economic one. In the latter sense a man's credits are 



158 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 73. 

simply the sum total of the moneys which others owe to him, 
and have nothing to do with his character or standing. 

Transfer of Credit. A creditor may transfer his rights to 
other legal persons on the same principles by which he trans- 
fers the ownership of wealth. The transferee then- takes his 
place as the possessor of the right in the way pointed out in 
II. 9. The methods and forms of transfer vary witli the nat- 
ure of the credit. Commonly, any piece of writing clearly 
indicating the transfer of the right, and duly signed by the 
party transferring, is sufficient. 

73. Sow Banks Arise. In a primitive state of society 
every payment of money is made by the payer actually deliv- 
ering the money into the hands of the payee. In modern 
mercantile operations this transaction would involve a heavy 
tax upon the resources of the community Large sums in pos- 
session of the owner would be in danger of being lost, stolen, 
or burnt. Serious danger of loss and theft would be incurred 
in the transportation of money from the office of the payer to 
that of the payee. Doubts and disputes about the amount 
actually paid, or the amounts in the possession of individuals, 
would frequently arise. 

A little consideration will show us that in most payments 
the delivery of the money is not necessary. Since only the 
ownership of the money is changed by the payment, and 
since, as a general rule, the payee only wants the ownership 
in order that he may transfer it to some other person, it fol- 
lows that all the requirements of exchange will be fulfilled if 
the money is stored where he can get possession of it in case he 
wants it, provided a systejm of transferring the ownership can 
be devised. Thus, all the inhabitants in a town may keep 
their money deposited in some one place, and make payments 
by transfers of ownership in such form as might be mutually 
agreed upon. Such is the basis of the banking system now 
prevalent in all civilized communities. 

A bank may be defined as primarily a place in which 



II. 74.] BANKS AND CREDIT-MONET. 159 

money is deposited for safe-keeping. It has, indeed, more com- 
plicated functions, but they will be best understood by start- 
ing from this first and most simple function of all. Let us 
then begin by considering the case of a town the inhabitants 
of which deposit all their money for safe-keeping in a single 
bank, and make all payments among themselves by transferring 
the ownership of the money. Such an institution is called a 
bank of deposit, and the moneys in it are called deposits. It 
is obvious that the total amount of deposits at any time 
would be the sum total of all the moneys owned by each in- 
dividual of the community at that time. It would therefore 
represent the volume of the currency so far as the town was 
concerned (§ VI). 

14:. Bank Deposits and Cheques. From what has been 
said of the dual character of financial transactions and obliga- 
tions, it will be seen that the deposits appear to the managers 
of the bank under two aspects. 

I. As liabilities or obligations of the bank. By this is 
meant the obligation of the bank to pay to each or any de- 
positor the amount of his deposit whenever required. Of 
course the sum total of liabilities is in this case equal to the 
sum total of the deposits. 

II. As resources of the bank. The resources would in this 
case be the coin in possession of the bank, and would con- 
stitute the fund which enables the bank to satisfy its liabili- 
ties. So long as the bank engaged in no other transactions than 
those which we have described, the resources and liabilities 
would remain equal. Of course there is no physical necessity 
for this equality, since the coin might be stolen without less- 
ening the liability of the bank. But the balance can always 
be produced by suitably accounting for any deficiency, so long 
as the accounts of the bank are kept in order. 

A statement of the condition of the bank at the close of 
business on any one day would then be in a form like the fol- 
lowing : 



160 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 76. 

Resources. Liabilities. 

Cash in vaults (coin) $25,000 John B. Smith, Creditor $500 

William Jones 1,250 

Samuel Rhett 850 

Etc., etc., etc. 



Total liabilities (deposits). .$25,000 

75. Cheques. The ownership of money in a bank is trans- 
ferred by an instrument in writing called a cheque. The 
drawer of the cheque is an owner of money deposited who 
wishes to transfer that ownership to another person. The 
drawee is the person to whom the transfer is made. The 
usual form of a cheque is the following : 

New York, June 30, 1685. 
Exchange National Bank, 
Pay to Samuel Rhett [drawee] or order 
($910) Nine hundred and ten dollars. 

William Jones [drawer]. 

By this instrument $910 of the right of "William Jones to 
his deposit in the bank is transferred to Samuel Rhett, whose 
right is increased by the same amount. When Rhett presents 
the cheque at the bank his credit is increased, and Jones's is 
diminished by this amount. Thus the cheque appears in its 
dual aspect as an increase of one man's credit and a diminution 
of another's, which cancel each other, leaving the sum total at 
$25,000 as before. 

*76. Transfer of Cheques. By long-established mercantile 
usage the drawee may transfer the right given him by the 
cheque to any other person, this person to another, and so on 
indefinitely, by suitable indorsements on the back of the 
cheque. This right is expressed by the words " or order," which 
mean his order or that of any party whom he may designate. 
Thus the ownership may pass from hand to hand like that of 
money 



II. 78.] BANKS AND CREDIT- MO NET. 161 

77. Individual Accounts. If to the total deposits of any 
customer last night be added all the cheques in his favor which 
he has deposited to-day, and from the sum be subtracted the 
cheques he has drawn to-day, the remainder will be his deposit 
to-night ; that is, it will express his share of the money held 
by the bank. In mercantile usage the subtractive quantity is 
transferred to the other side of the equation, which thus be- 
comes credit yesterday plus cheques since deposited equals 
cheques drawn plus credit to-night. Thus the amount may be 
balanced every day. 

Variations of Sum Total of Deposits. In the case so 
far supposed, so long as no party in town made payments 
to parties outside, or received payments from parties outside, 
the total amount of the deposits would remain unchanged. 
The only varying quantities would be the individual amounts 
owned by each depositor ; and the additions would in all cases 
balance the diminutions. But when a depositor had to make a 
payment abroad, he would have to withdraw his money for that 
purpose. Thus the sum total would be diminished by all pay- 
ments made by the townspeople to persons outside. When 
a depositor receives money from parties outside he deposits it in 
the bank, and the sum total is then increased by the amount so 
received. Thus the sum total would fluctuate according as the 
payments in one direction or the other were in excess, and the 
state of the bank from day to day would be the index of the 
balance of trade of the town with the world outside. 

78. Capital of the Bank. That perfect solvency which 
has just been described would depend on the bank's meeting 
with no losses. Since all mercantile transactions are now 
and then liable to loss, it is necessary that the bank, in 
order perfectly to secure the depositors whose money is loaned, 
should have a guarantee capital. This capital is a fund sub- 
scribed or paid in by the stockholders of the bank, who thus 
become the owners of its rights. The capital thus paid in ap- 
pears again on both sides of the statements of the bank. 

ii 



162 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 79. 

As a liability it expresses the sum which, in case the bank 
stopped business, it would have to return to its individual 
stockholders. As a resource it is expressed by this additional 
amount of cash in the vaults of the bank. If a capital of 
$15,000 were paid in to our supposed bank, its statement would 
then appear in the following form : 

Resources. Liabilities. 

Cash in vault $40,000 Due depositors $25,000 

Capital stock 15,000 

$40,000 

This statement means simply that out of $40,000 cash in 
the vaults, $25,000 belongs to depositors, and $15,000 to the 
stockholders. 

79. Discount Functions of the Bank. The cost of man- 
aging such a bank as we have described would have to be paid 
by its customers, since we have assigned it no business by 
which it could make a profit. Having in its possession all 
the coin owned by the town, the bank would find a certain 
sum lying idle in its vaults from year to year and from gener- 
ation to generation. For although, as we have just shown, 
the sum of the deposits would fluctuate according to the state 
of trade with the outside community, yet in practice these 
fluctuations would be slight. Although the individual may and 
often does pay out all the money he has got, the community 
at large never does. If the average amounts of deposits were, 
as we have supposed, $25,000, it might be found that they oc- 
casionally went as high as $30,000, and might perhaps from 
time to time fall as low as $20,000. Of course no numerical 
rule for the limits can be set in practice. But the actual fluc- 
tuations are found to be of this order of magnitude. Thus the 
sum idle forever in the vaults of the bank might be fixed at 
$20,000 plus the capital, making $35,000 in all. Now the bank 
could loan this money out at interest without any danger of its 
being unable to fulfil its engagements ; and this for two reasons : 



II. 79.] BANES AND CREDIT-MONET. 163 

in the first place, as business goes, it would not be called upon 
by the depositors of the money loaned to pay it ; and in the 
second place, if it ever should be called upon, it could get the 
money by demanding payment from the borrowers. Hence 
so long as the loans were well secured the solvency of the bank 
would be unimpaired. 

The result of this policy would be, that instead of the insti- 
tution being a custodian of money, it would become a horrower, 
bound to repay the money on demand, but at liberty to loan it 
out as long as the depositor does not demand it. The deposit 
then becomes a credit simply, and the depositor, instead of 
being the owner of money ', is the possessor of a right, namely, 
the right to require money from the bank and enforce its 
payment. 

Now, b}' the Irypothesis just made, suppose that there is in 
the vaults of the bank a cash sum of $20,000, which lies there 
unused year after year and generation after generation, and an 
additional sum of $15,000 paid in by the stockholders. This 
makes a sum of $35,000 which the bank can loan out at inter- 
est without any danger of being unable to meet its obliga- 
tions on demand. Then all residents of the town who want to 
borrow money can go to the bank and secure loans until the 
whole $35,000 is thus borrowed. For each sum borrowed the 
borrower gives his promissory note, which in banking practice 
is usually payable in one, two, or three months. 

The very same reason which originally prompted the de- 
positors to place their money in the bank will now prompt the 
borrowers to deposit their loans, and to make such transfers as 
they desire by cheques upon the bank. When these loans are 
all effected, and the deposits made, the state of the bank is as 
follows : 

The amount of cash in the vaults remains the same as before, 
$40,000, since all borrowed has been re-deposited. 

The amount due depositors is increased by $40,000, which 
they have borrowed and immediately deposited. 



164 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 80. 

This amount is balanced by $40,000 in promissory notes 
from the borrowers, payable in one, two, or three months. 

The promissory notes represent moneys collectible by the 
bank and applicable to the liquidation of its liabilities. Hence 
the statement of the bank will now be as follows : 

Resources. Liabilities. 

Cash in vaults $40,000 Capital stock $15,000 

Prom, notes (discounts) 35,000 Due depositors 60,000 

Total resources $75,000 Total liabilities $75,000 

This means that of the cash on hand and debts due, amount- 
ing in all to $75,000, $15,000 belongs to the stockholders and 
),000 is due depositors. 



80. We now have a state of things which may almost seem 
paradoxical, and which is a frequent source of confusion to those 
not familiar with business. The inhabitants of the town con- 
sider that they have altogether $60,000 in money in bank, and 
yet there exists only $40,000 in money all told. They are 
therefore, in a certain sense, the possessors of money which has 
no real existence. There is, however, nothing more confusing 
in this than that a man should be the owner of a table which 
is not yet made, but which the maker has agreed to finish and 
deliver next week, or that he should be the owner of a house 
which a contractor has agreed to build. In fact he is not the 
owner of money, but the possessor of credit, which, as already 
explained, is merely a debt from the bank. But this credit 
serves all the purposes of money, and may be used in making 
exchanges, exactly as if it were gold and silver. 

Since each depositor counts himself the possessor of so much 
money in the bank, it follows that the total volume of the cur- 
rency is now $60,000. We therefore reach the conclusion that 
the volume of currency in circulation may include not only 
material money, but credit, expressed by nothing more than 
figures written in the books of a bank. In other words, when a 
customer goes to a bank, gives his promissory note for $1000, 



II. 81.] BANKS AND CREDIT-MONET. 165 

and has the figures $1000 written on the credit side of his ac- 
count, thereby giving him the right to draw cheques for that 
amount, an addition of $1000 is made to the total volume of 
the effective currency. By effective currency we mean that 
which can be used in payment. 

Since all the money borrowed has been deposited, there still 
remains the same amount in cash in the vaults of the bank. 
But this amount will fluctuate yet more than before, owing to 
the number of persons who may make or receive payments to 
or from the rest of the world. Still it would probably be 
found that the amount would never fall below $30,000. This 
sum could again be loaned out to customers, and if they de- 
posited it, it could be loaned again, and so on indefinitely. Thus 
we cannot set any mathematical limit to the volume of the credit 
currency which the bank may have in circulation through the 
cash in its vaults. But with every increase in this volume 
there would be an increase in the fluctuations arising from trade, 
so that a limit of safety would be soon reached. The national 
banking law of the United States sets the limit at 25 per cent 
of the current liabilities, but of course the bank must seek to 
keep its cash a little above that limit. In the case supposed, 
when the bank had approached the safe limit to the amount of 
its loans, its statement would be in this form : 

Resources. Liabilities. 

Cash in vaults $40,000 Capital stock $15,000 

Prom, notes (discounts) 120,000 Due depositors 145,000 

Total resources $160,000 Total liabilities $160,000 

81. Bank Circulation. It often happens that the deposi- 
tor or borrower desires to make payment without the formality 
of drawing and signing a cheque. The bank may then, in 
making him a loan, issue its own promissory note, payable on 
demand. Thus arises the familiar hank-note. This transac- 
tion will consist in the simple exchange of credit between the 
individual and the bank. The individual gives the bank his 



166 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 82. 

promissory note, payable with interest at some future time, and 
in return receives from the bank its own promissory note, pay- 
able on demand without interest. If now we suppose our 
bank to issue notes in this way to the sum of $10,000, its 
statement will be as follows : 

Kesoukces. Liabilities. 

Cash in vaults $40,000 Capital stock $15,000 

Prom, notes (discounts) 130,000 Due depositors 145,000 

Circulation 10,000 

Total resources $170,000 Total liabilities $170,000 

At this point we may notice. one of those singular mistakes 
which frequently influence the views and actions of masses 
of men, although in direct conflict with facts which would 
be well known would men only attend to them. This error 
is the belief that the main function of a bank is to issue cir- 
culating notes. It may be questioned whether this function 
should be considered a legitimate one of any bank, and as a 
matter of fact the large majority of the banking firms of the 
world do not issue such notes. Public or incorporated banks 
generally, but not universally, issue them. We shall hereafter 
see reason to believe that if no such thing as a bank-note for 
general circulation had ever been thought of, the world would 
not have been any worse off. 

82. Ulterior Development of the Bank. The transactions 
which we have described complete those which necessarily per- 
tain to the business of conducting the bank. In practice, how- 
ever, there is yet further development in various ways. In 
the first place, instead of all the business men of the town 
keeping their money in one bank, there are frequently a great 
number of banks. The result is that when a payment is made 
by cheque it will happen in a large majority of cases that the 
payee does not himself keep an account in the bank on which 
the cheque is drawn, but in some other bank. Then, instead 
of sending himself to the bank to get his cheque cashed, he 



II. 82.] BANKS AND CREDIT-MONEY. 167 

hand's it to his own bank, authorizing the latter to collect it by 
indorsing his name on the back. The result is that in the 
course of the day the various banks of the city will have a col- 
lection of cheques drawn against each other. 

Now if we take the sum total of all the cash in the banks 
of the city, it will remain true (leaving out the exceptional 
cases where parties withdraw cash to make payments) that the 
sum total will vary only in consequence of payments to par- 
ties outside the city. But when the cheques drawn upon each 
other are presented, each bank is obliged to pay in cash all 
drawn upon itself, and has the right to collect in cash all held 
for payment by other banks. The cash in the vaults of any one 
bank will then increase or diminish according as the cheques 
deposited with it are in excess of or below those drawn upon 
it. Still, as business ordinarily goes, it will frequently happen 
that these amounts closely balance each other. 

As business goes on, the accounts of the resources and liabil- 
ities of the bank become more complex. The statement can 
be balanced at any time by calculating the conditions if the 
bank should at that moment wind up all its business and dis- 
solve. Its resources would then consist of all the property 
which it possessed and all the debts due to it, in whatever 
shapes they might be. Ideally we conceive that this whole 
sum is put into cash. The liabilities would then consist essen- 
tially of the statement what would be done with this cash. 
In the first place, the depositors and holders of notes would all 
have to be paid off. Then other creditors would have to be 
paid, the capital stock would have to be made good, and the 
balance would be divisible pro rata among the stockholders as 
accrued profits. It must also be remembered that, in the state- 
ments published by the banks, the cash on hand and debts due 
are divided up under a number of separate heads, instead of 
being combined into one sum total. These little details are, 
however, of slight economic importance, and all that is essen- 
tial for the student is to understand the nature of the large 
amounts which pertain to the conduct of the business. 



168 DESCRIPTION OF TIIE SOCIAL ORGANISM. [II. 83. 



CHAPTER XIII. 

ORGANIZATION OF BANKS IN DETAIL. 

83. The system of banking, as described in the preceding 
chapter, is subject to a weakness dealing with which is the 
most intricate problem connected with the subject. The 
source of weakness is this : the bank, in order to make any 
profit, must always have upon its books credits payable on 
demand (that is, deposits and circulating notes) to an amount 
greater than it has the cash on hand to pay with. The result 
is that if everybody having money in the bank should de- 
mand immediate payment, the bank could not fulfil its obliga- 
tions, and would be obliged to postpone payment and suspend 
business. But this suspension would not imply any lack of 
ability to make good its obligations in the course of time. 
Excluding such abnormal cases as those arising from defalca- 
tion, robbery, bad debts, etc., every bank has on hand not only 
cash, but the promissory notes of its customers ; and these two 
items, as already shown, must, in the normal case, equal or ex- 
ceed the deposits and capital combined. A well-conducted 
bank has generally a large reserve fund in addition to what 
would make good its capital and deposits. 

Let us see the consequences of a continued demand upon a 
bank for the payment of its debts, called in common language 
a " run." Suppose the run to be upon the bank whose condi- 
tion is described in § 81. It has on deposit or in circulation 
the sum of $155,000 ; that is to say, it has credit to this amount 
circulating as money through the medium of cheques and 
notes, and forming this amount of the currency of the com- 
munity. Suppose now that the owners of this whole $155,000 
come day after day to demand payment, while no others de- 
posit money in their places. The bank having cash to the 



II. 83.] ORGANIZATION OF BANKS IN DETAIL. 169 

amount of $40,000 can redeem this amount of its indebtedness. 
But there will still be $115,000 outstanding. In order to meet 
this indebtedness it must refuse to discount any more notes, and 
must require the payment of all those which it holds, as fast as 
they become due. As the payments come in they can be ap- 
plied to the redemption of the indebtedness until the whole 
$115,000 remaining is paid. This will still leave $15,000 out 
of the $130,000 of notes discounted, and this money will be- 
long to the stockholders as capital. The final result of the run 
will be as follows : 

I. A diminution of $115,000 in the volume of the currency 
circulating in the community. Instead of $145,000 in bank 
credits and $10,000 in bank-notes, there is now circulating 
$40,000 in coin, just as if the bank had never been organized. 

II. The bank will during a period of several months have 
been obliged to refuse to loan any money to its customers, and 
thus many of the latter, failing of their expected loans, will be 
unable to pay their debts. 

These two evils will tend to aggravate each other, since, 
owing to the diminution in the volume of the currency, not 
only the ability of the merchants to borrow from the banks, 
bnt to borrow from other people, will be diminished. So long 
as a man has a considerable deposit in the bank he is in a much 
better position to loan money than when he has only a small 
quantity of coin on hand. The general result will be what is 
called a "commercial panic," or a general inability on the part 
of large numbers of the community to pay their debts. 

But this, be it remembered, results, not from any inherent 
necessity of the case, but because the customers of tiie bank, 
either from loss of confidence or from any other reason what- 
ever, have determined to withdraw their balances. So long as 
general confidence is felt in the bank there is no danger of a 
run upon it. The state of mind of the ordinary depositor has 
been facetiously expressed in the form : " If you can pay me 
my money, I do not want it ; but if you cannot pay me, then I 
must have it." The reason why a general run upon banks is 



170 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 84. 

never to be feared under ordinary conditions is that there can 
be no occasion for it. The depositor can generally make his 
ordinary payments in his own community by cheque as easily 
as by money ; and even if he must withdraw his money to 
make the payment, the chances are that the payee will re- 
deposit it in the same bank or in some other bank. The ex- 
■ ceptional cases arise when he is to make a payment in some 
other place, or when he wants the gold or silver coin to use for 
some other purpose than paying it out. 

The reader must, however, be on his guard against the popu- 
lar illusion that these exceptional cases can never arise except 
from distrust of the bank. Such would indeed be the case if 
no one ever wanted money except to pay out within the sphere 
of operations of the bank. But experience shows that if banks 
act on this supposition by increasing their credits, their deposi- 
tors will come demanding coin for foreign export, or to melt 
down for manufacturing purposes. We shall hereafter see that 
the facility with which coin can be exported operates like a 
safety-valve to stop an undue expansion of bank credit. The 
banks themselves keep each other in check by requiring the 
prompt payment of all cheques which they hold against each 
other. 

84. On the other hand, there always exists a greater or less 
tendency towards an increase of the discounts and deposits of 
a bank. Men of business continually want to borrow money, 
provided the rate of interest is not too high ; they therefore go 
to the banks for loans. But instead of taking the loans out as 
cash, they commonly leave them on deposit, and make their 
payment by cheques. In such cases there is a simple exchange 
of indebtedness, the bank acknowledging the indebtedness to 
the customer on demand, while the latter gives his note for 
the same sum payable with interest at a future time. When 
business is brisk and merchants see good opportunities for 
profit by enlarging their operations, they naturally go to their 
banks for discounts, thus creating a demand for money, or, to 



II. 85.] ORGANIZATION OF BANKS IN DETAIL. 171 

speak more accurately, for bank credits. In order to avoid too 
great an extension of this credit, the bank raises its rate of in- 
terest, thus discouraging the applications of those borrowers 
who do not expect to make a profit to justify the increased 
rate. "When business is dull the opposite effects take place : the 
merchants pay off their notes instead of letting them continue 
at interest, and the bank must lower its rate of interest in order 
to attract borrowers. 

85. Since all the profits which banks can pay their stock- 
holders are derived from the interest on the moneys loaned, 
and since all the coin in the vaults is so much dead capital 
drawing no interest, there is a certain tendency on the part of 
banks to make the largest loans on the smallest available cash 
reserve. How far this temptation will be yielded to depends 
upon the good management and soundness of the bank, the 
general financial state of the community, and the laws which 
govern banks. In new countries, where the rate of interest is 
high and the demand for loans great, the temptation is much 
stronger than elsewhere. Thus arose the " wild-cat banking" 
which was so prevalent in our new States during their early 
history. "When a "wild-cat" bank was established, its practice 
was to loan its own notes on interest. The banker knew that 
there was little immediate danger of these notes coming back 
in great numbers, because the community was too much in 
want of them as money. He was therefore tempted to loan 
them on insufficient security, especially as good security was 
difficult to obtain under the circumstances. If he could in- 
duce his customer to carry the notes to a great distance, the 
danger of their being returned for payment became still less. 
So long as people would take his notes, he was thus enabled to 
draw a high rate of interest on a very small capital. When 
his notes finally returned for payment, he was frequently 
obliged to refuse them. To make him pay would cause em- 
barrassment to the business community, and thus his creditors 
were disposed to deal very gently with him. The result was 



172 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 86. 

throughout our whole western country a great mass of depre- 
ciated paper money, issued by banks which those who handled 
the money really knew nothing about — money which frequently 
proved worthless, thus causing great loss to the last holders. 

86. Suspension of Specie Payments. We have described 
the distress resulting to a community in the case of a general 
run' upon banks, causing a shrinkage of the circulation and an 
inability of the bank to make loans to those requiring them. 
To avoid this evil it used to be very common in America for 
banks to suspend specie payment under such circumstances. 
Then, when the depositor came for his money, they refused to 
pay him in cash, but tendered him only a circulating note of 
their own or some other bank. If he asked the payment of this 
note, he was told that he must wait. By thus dishonoring its 
own obligations, the bank was enabled to continue making 
loans to its customers. In order to do so, it only had to write 
the appropriate credits on the books of the bank in exchange 
for the customer's promissory notes. What it loaned him, how- 
ever, was not money, but rather the hope of money. There 
was little danger, within moderate limits, of the bank having to 
pay out large amounts of these notes, because no one had an 
object in demanding notes which would serve him no better 
purpose than the credits in his bank-book. The bank in its 
relation to its depositors was in the position of a debtor who 
was not obliged to pay out anything but promises to pay, and 
who could therefore afford to accumulate debts while awaiting, 
the return of better times. 

To these defects of the old bank currency we may add the 
evils arising from counterfeiting. Counterfeit bank-notes were 
so numerous that the " Bank-note Detector " was almost a ne- 
cessity in every place where considerable sums of money were 
paid and received. This Detector was a periodical publication, 
giving the names of all the incorporated banks in the different 
States, with descriptions of the genuine notes of each denomi- 
nation, and of the counterfeits which had got into circulation. 



II. 88.] ORGANIZATION OF BANKS IN DETAIL. 173 

87. National Banking System of 'the United States. The 
evil tli us arising led during the Civil War to the establishment 
by Congress of the national banking system of the United 
States. Our account of this system will be confined to its lead- 
ing economic features. Every such system requires for its 
operation many legal enactments which do not concern the 
economist. The latter is principally concerned with the provi- 
sions which regulate the credits of the bank, and the funds 
which it holds to make good such credits. We call to mind 
that an important part of the circulating medium does not con- 
sist of coined money, but of debts payable on demand by the 
bank, the right to receive which is transferred from hand to 
hand as if it were money. In order that these debts may be 
of equal value with coin, the bank is obliged to pay them on 
demand. They are of two kinds, bank-notes and bank credits. 
The latter are transferred by simple delivery, as in the case 
of money. The former are transferred by written cheques as 
already described. To pay this indebtedness on demand, the 
bank has two kinds of resources. The one consists of promis- 
sory notes of business men, payable with interest at future 
times, and of other forms of property and of credit. The 
other resource is coined money. Since, as already shown, the 
volume of coined money is less than the amount of credit pay- 
able on demand, and since the greater the volume of the latter 
the higher the profit of the bank, it follows that there must 
be some restrictions upon the power of the bank to increase its 
credit money and pay out its stock of coin. These restrictions 
we shall now proceed to consider. 

88. Private banks — that is, men or firms who become 
bankers simply as a matter of private business — are not ordi- 
narily subject to any legal limitations. It may be assumed that 
no one does business with such a banker unless he is satisfied 
of his good financial standing and of his business ability and 
prudence. The interest which the banker feels in his own 
reputation is a strong incentive to caution, and, in the view of 



174 DESCRIPTION OF TEE SOCIAL ORGANISM. \U. 89. 

some, offers better security than any law directing him how to 
regulate his business can offer. 

Private bankers may establish book credits in favor of their 
customers to any extent, thus performing all the functions of 
banks of deposit, but they are not allowed to issue circulating 
notes. Now, although a book credit transferable by cheque is 
economically of the same nature as the indebtedness expressed 
by a bank-note, yet the two stand on a very different footing 
in their relations to the community. Cheques are generally 
drawn for considerable sums, and are employed for payments 
only between well-known and responsible men of business. 
Since every person who draws or indorses a check thereby 
guarantees its validity, any person receiving it can not only re- 
quire payment of the bank, but in case the bank does not pay 
lie has the right to require payment of the drawer or of any 
previous indorser. Hence he has a greater security than that 
afforded by the solvency of any one individual taken singly. 

But in the case of bank-notes this additional security is 
wanting. "When they once get into circulation they will be 
offered in the course of trade to persons who know nothing 
about the bank and have no means of assuring themselves that 
the note is genuine. It therefore seems more necessary that 
the law shall protect the individual against the danger of being 
compelled to take a worthless bank-note than that it shall pro- 
tect him against the' danger of a worthless cheque. In the one 
ca.se he can protect himself, and in the other he cannot. 

89. The principle of protection adopted in the national 
banking system is taken from one previously in force in the 
State of New York. To see what the principle is, let us once 
more recur to the relation between the amount of notes which 
a bank has in circulation and the funds it retains in its vaults 
to pay those notes whenever required. The bank could be re- 
quired to keep in its vaults a supply of coin equal to the whole 
volume of its notes, and to use this coin for no other purpose 
than the payment of the notes as presented. But it has already 



n. 90.] ORGANIZATION OF BANKS IN DETAIL. 175 

been sliown that, were this policy adopted, the bank would 
have nothing to compensate it for the expense and labor of 
issuing the notes. It's only source of compensation is the inter- 
est gained by loaning the money held in reserve. The problem 
then is to allow this reserve to be invested in such a way as to 
yield interest, and at the same time to be available for no other 
purpose than the payment of the notes in case of necessity. 

Our national banking system requires that before issuing 
notes a bank shall have deposited with the Treasurer of the 
United States interest-bearing bonds of the United States to an 
amount not less than $30,000 and not less than one third of its 
capital stock. Thereupon the bank is authorized to issue cir- 
culating notes to an amount not exceeding 90 per cent of the 
par value or the market value of the bonds so deposited. To 
guard against an excess of notes above the legal limit, the bank 
is not allowed to issue any except such as it receives in blank 
from the Comptroller of the Currency in Washington. The 
bonds held by the Treasurer can be applied to no purpose ex- 
cept the redemption of the notes in case the bank fails to 
redeem them itself. The bank, however, regularly receives the 
interest on its bonds. The result of this arrangement is that 
although a bank may fail to pay a note on demand, the holder 
of the note is secured against ultimate loss. Consequently no 
person in taking a national-bank note has any occasion to con- 
cern himself with the standing of the bank which has issued it. 
Probably in not one case out of a hundred does the person who 
receives a note look to see what bank issued it. Counterfeits 
are of course possible. But the public has to trust the vigi- 
lance of the government to guard it against them. 

90. It is of course always necessary that a well-ordered 
bank shall keep on hand a reserve in coin or legal-tender money 
available to pay its notes and credits as they are from time to 
time presented. The question how large this reserve must be 
is one of the most difficult in banking. In the case of private 
banks it is, as already said, left to the discretion of the bankers 



176 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 90. 

themselves. In the case of national banks in any of the prin- 
cipal cities of the Union the reserve is required to be at least 25 
per cent of the outstanding circulating notes and deposits of 
the bank. In the case of banks situated in the smaller towns 
the required reserve is 15 per cent. 

Of course it cannot be required absolutely that the reserve 
shall never fall below this limit, because the very object of the 
reserve is to pay the indebtedness on demand, and if payment 
is demanded faster than money is received the reserve may fall 
to zero. The law therefore simply requires that when the re- 
serve falls below the required limit the bank shall not increase 
its liabilities payable on demand ; in other words, it shall stop 
loaning money. 

Thus the law does the best it can to insure that the business 
of the national banks shall be conducted on sound principles. 
But experience shows that no legal provisions can afford secu- 
rity against bad management. Examinations are made from 
time to time to see that every bank has on hand the securities 
and other property which the state of its business requires. But 
when a bank is authorized to loan money to individuals, no ex- 
amination can make it certain that the borrowers are all solvent. 
Bad debts are incurred from time to time, and stocks and bonds 
may depreciate or become worthless. The holders of circulat- 
ing notes have still a security which is almost certain, in the 
bonds deposited with the Treasurer of the United States, but 
creditors of all other kinds are liable to suffer loss. Yet, if we 
should compare the loss actually suffered with the business 
transacted, the amount of risk would be found surprisingly 
small. The daily transfers made by bank notes and credits 
amount in the city of "New York alone to many millions of 
dollars. The total loss in the whole country to depositors 
probably never amounted to a million of dollars in any one 
year, except in cases of some great swindle. The danger of 
loss incurred by money in one's pocket or drawer is many 
times that which it incurs when deposited in any bank man- 
aged with common honesty and prudence. 



II. 91.] ORGANIZATION OF BANKS IN DETAIL. 177 

91. Tlie Bank of England Plan. The problem of estab- 
lishing a proper relation between the credit currency issued 
by a bank and its reserve fund is met differently in different 
countries. In this respect the Bank of England is governed 
by the celebrated Charter Act of 1844, a measure due to Sir 
Robert Peel. The business of the bank is divided into two 
separate departments, the one the " banking department," the 
other the "issue department." The banking department re- 
ceives deposits transferable by cheque in the way described in 
the preceding chapter, but it does not issue notes. The issue 
department emits bank-notes for circulation, and keeps its sepa- 
rate reserve fund to insure payment of the notes. 

The basis of the regulations governing the issue department 
is this : it was found that the volume of notes in actual circula- 
tion generally ranged between sixteen and twenty millions of 
pounds, seldom or never falling below the former limit. It 
was therefore assumed that a certain minimum volume of bank- 
notes would perpetually remain in circulation, and so never 
be presented for actual payment at the counter of the bank. 
This assumed minimum was originally fixed at fourteen mil- 
lions, but has since been increased to fifteen millions. This 
amount may be issued by the bank without keeping any coin for 
their payment, though of course, as already shown, an equal 
amount of promissory notes from individuals, or of govern- 
ment securities, must always be held by the bank. But for 
every note issued above this minimum an equal amount in coin 
or bullion must be held by the issue department of the bank. 

The result of this arrangement is that if the volume of the 
coin-reserve diminishes, so as to be but little above the excess 
of notes in circulation over fifteen millions, no more notes can 
be issued. Now, for reasons the statement of which belongs 
to a more advanced part of our subject, this state of things is 
likely to occur at the very time when the public are most in 
need of notes, credit, or other forms of currency. The power 
of the bank to perform one of its functions is thus paralyzed at 
the very moment when this function is most essential to the 

12 



178 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 91. 

business interests of the community. This difficulty has been 
met by an expedient known as a "suspension of the Charter 
Act " by an " order in council " of the government.* 

Three such suspensions have been authorized, in the years 
1847, 1857, and 1866 respectively. The suspension authorizes 
the bank directors to count the reserve of the issue depart- 
ment as a part of the reserve fund of the banking department, 
so that the latter could still discount the notes of merchants, 
although its reserve fell below the proper limit. 

The necessity of this suspension has subjected the act in ques- 
tion to criticism, on the ground that a law which has to be sus- 
pended from time to time proves itself to be defective by its 
own operation. If the object of human laws is to establish 
regulations which shall forever govern the relations of men, 
without any modifications whatever, then this criticism is un- 
doubtedly sound. But taking a different point of view, we 
may regard the arrangement as one of the finest examples of 
the practical adaptation of laws to the varying circumstances 
of mankind that ever was invented. A law is devised which 
works with entire success except in rare emergencies. The 
provision that it shall cease its operations temporarily under 
these emergencies may be regarded from a practical point of 
view as an excellent one, the law being enforced so long as it 
is beneficial, and no longer. 

* The term "suspension" applied to these orders is sometimes mis- 
construed by people in this country not conversant with financial affairs, 
through the same word having been applied here to the cessation of specie 
payments by our banks. The assumption that a " suspension " of the bank 
act meant a suspension of specie payments by the bank, though utterly 
false, was frequently urged by popular orators as an excuse for the issue of 
paper money. As a matter of fact, the Bank of England has not for a 
moment suspended specie payment, or thought of doing so, since its re- 
sumption in 1819. 



H. 92.] TEE CLEARING-HOUSE SYSTEM. 179 



CHAPTER XIV. 

THE CLEARING-HOUSE AND FOREIGN EXCHANGE. 

92. In the great financial centres the banks have a system 
of balancing their accounts, the study of which is instructive to 
the student of economics, because it shows an ideal system by 
which we might imagine the accounts of every individual with 
the community to be balanced in the actual commerce of the 
world. To understand it let us commence by considering 
what the banks are to do with the cheques which they hold 
upon other banks. Let us suppose that there are ten banks 
of deposit in a town. Then, under the system explained in 
Chapter XIII., each bank will have deposited with it each day 
a greater or less number of cheques drawn upon each of the 
other nine banks. It therefore has the right to send these 
cheques around to the banks on which they are drawn and 
receive the money for them. Were this process actually gone 
through with, the amount of coin to be transported back and 
forth would be very great, almost equal in fact to the sum 
total of all the mercantile transactions of the town during the 
day. But it is evident that since bank A holds cheques drawn 
on bank B, and bank B holds cheques on bank A, only the dif- 
ference of the sums total of these two classes of cheques will 
have to be paid in money. Thus a certain amount of trans- 
portation of coin may be saved by each bank, through a repre- 
sentative, meeting each of the others in advance of payment, 
exchanging cheques, and having each debtor bank pay the bal- 
ance due to the creditor bank. 

But a little consideration will show that a still greater saving 
is ideally possible. Let each bank at the end of the day add 
up the sum total of the cheques which it holds against all the 
other banks. Let the sum total of these credits be called C. 



180 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 92. 

Then take the sum total of all the cheques against it held by 
other banks, which it must pay. If we call this sum total of 
its debts D, it is clear that, after all payments are made, the 
amount of money in its vault will be algebraically increased by 
C minus D. In other words, it will have received C dollars 
and will have paid out D dollars. "When D is greater than C, 
its stock of coin will be diminished by the difference of the 
two quantities ; when less, it will have been increased by this 
difference. Hence all the money which it is really necessary 
for the bank to handle is this difference. Moreover, since 
every cheque appears as a credit in favor of one bank, and an 
equal debit against the other bank, it is evident that the sum 
total of the C's for all the banks will be exactly equal to the 
sums total of the D's. If, therefore, we call each bank whose 
C is greater than its D a creditor bank, and each bank whose 
D is greater than its C a debtor bank, the sum total of the 
credits held by the creditor banks will be exactly equal to the 
sum total of the debts due by the debtor banks. Hence : If 
any agency collects all the amounts due from the debtor banks, 
the agency can with the money thus collected jpay all that is 
due to the creditor banks. 

Such an agency is called a clearing-house. All the 
cheques drawn on any day are brought to the clearing-house on 
the following morning. The sum total of the cheques held by 
each bank is added up, thus showing the amount C of each 
bank's gross credits. The grand total of all these credits is the 
sum of all the cheques. 

The cheques are then re-classified with reference to the 
banks on which they are drawn. The sum total drawn against 
each bank is its D. The grand total is again formed, which is 
of course equal to the grand total of the C's. The table on the 
opposite page shows how the operation may be performed. 

Under each bank whose name is found at the top of a col- 
umn is written the amount of the cheques which it holds against 
the several other banks whose names appear on the side. Thus 
the Exchange Bank is supposed to hold cheques to the amount 



II. 92.] 



THE CLEARING-HOUSE SYSTEM. 



181 



of 284 units (which we may consider to be dollars, hundreds 
or thousands of dollars as we please) against the Planter's 
Bank ; 276 against the Merchant's Bank ; 420 against the Gro- 
cer's Bank, etc. Adding up its column, we find the sum total 



Name of Bank. 


Plan- 
ter's. 


Mer- 
chant's 


Gro- 
cer's. 


Ex- 
change. 


State. 


City. 


North. 


Total. 


Merchant's 


$735 
150 
262 
819 
522 
415 


$532 

724 

163 

875 
808 
194 


$216 
432 

183 
896 
404 
325 


$284 
276 
420 

208 
525 
179 


$725 
818 
324 
790 

4i5' 

529 


$802 
901 
293 
416 
184 

279 


$219 
364 
892 
246 
325 
214 


$2,778 
3,526 
2,803 
2,060 
3,307 
2,888 
1,921 


Exchange 

State 


City 


North 






Total 


$2,903 


$3,296 


$2,456 


$1,892 


$3,601 


$2,875 


$2,260 


$19,283 







of all the cheques which it holds against all the other banks is 
$1892. In the same way the Planter's Bank holds cheques 
against the other banks to the total amount of $2903, and so 
on. Thus we have the sums total given at the bottom of each 
column as the total credit, C, of each bank. 

Now consider the horizontal lines. The Planter's Bank has 
against it $532 held by the Merchant's Bank, $216 by the Gro- 
cer's Bank, etc. The sum total is found in the right-hand col- 
umn to be $2778. 

Now take the banks individually with reference to their total 
debts and credits. The Planter's Bank has a total credit of 
$2903, and the total debt is found in the right-hand column to 
be $2778. Balancing this account, it is a net creditor to the 
amount of $125. Taking the other banks in the same way, 
we find the folio wins: results : 



Debtor Banks. 

Merchant's $230 

Grocer's 347 

Exchange 168 

City 13 

Total $758 



Creditor Banks. 

Planter's $125 

State 294 

North 339 



Total. 



The debts are now balanced in the following way : The 
Merchant's Bank pays into the clearing-house $230, the Gro- 



182 DESCRIPTION OF TEE SOCIAL ORGANISM. [II. 93. 

cer's $347, the Exchange $168, and the City $13, making a 
total of $75S. The clearing-house pays $125 of this sum to 
the Planter's Bank, $294 to the State Bank, and $339 to the 
North Bank, which at the same time exhausts the fund and 
settles all the accounts. By these small payments transactions 
amounting in all to $19,283 are settled with exactly the same 
result to each bank as if each account had been settled sepa- 
rately. A mass of indebtedness which amounts to a vast sum 
total is thus balanced by comparatively small payments. 

93. In practice this clearing-house system can only be ap- 
plied to banking institutions. But if all mankind were per- 
fectly reliable and honest, it could be carried into all the ac- 
counts of society, and the use of money would then be con- 
fined to the payment of balances at stated periods. Every 
man who produces and sells anything, or who renders to his 
neighbor or the public at large any services for which he re- 
ceives money in payment, is, by the act of supplying such 
commodity or service, a creditor ; and this credit or service is 
balanced by the money he receives. For whatever lie pur- 
chases or gains from others he is a debtor ; and he pays his 
debt in money (cf. § 55). "We might then imagine an account 
kept between each person and society at large, the latter being 
the clearing-house. The value of every commodity or service 
which he rendered to others would be recorded, this value 
being exactly what would have been paid for it had it been 
done for money. On the other side of the account everything 
he gained or received from others would be charged against 
him. Then at stated intervals, once a year for instance, we 
might suppose his accounts balanced by his paying to some 
central person the excess of his debits, and receiving the excess 
of his credits. The final result of this system would be the 
same to which the actual system of exchange by means of 
money leads. But owing to the imperfections of human 
nature, and the impossibility of keeping such an account in a 
way which every one would agree upon as perfect and free 



II. 94] FOREIGN EXCHANGE. 183 

from error, the balance has to be preserved in each individual 
case by the actual transfer of money back and forth. 

94. Of Foreign Exchange. If we consider once more the 
subject of credit, we shall see that to give a credit entire pre- 
cision two agencies and two provisions come into play. 

The first agency is a debtor, who may be any legal person 
whatever, but in the case that we are now considering is gen- 
erally a banking or mercantile firm. 

The second agency is a creditor, or person to whom the 
payment is due, who also may be any legal person whatever. 

One provision is a designated place of payment. 

Another is a designated time of payment. 

The necessity of having a designated place of payment will 
appear on reflecting that without it the debtor might not know 
where to find the creditor. Hence in mercantile credits the 
bank or other point where the parties or their agents must 
meet in order to make and receive payment has to be speci- 
fied. Again, if no time of payment were understood, but if 
the act could be postponed indefinitely at the option of the 
creditor, the debt would be worthless. Hence in mercantile 
credits the time when payment is to be made is always speci- 
fied, and when not specified the debt is payable on demand. 
For our present purpose we need not take account of any post- 
ponement of the time of payment, but may consider the debt 
as payable upon demand. 

Kow the creditor and debtor need not live in the same 
place nor in the same country. The place of payment may be 
yet a third country, though it is more commonly the country 
in which the debtor resides. Hence a person may be the 
owner of the right to receive money in a foreign country. 

Credit payable in a country foreign to the creditor is called 
foreign exchange, or simply exchange. Exchange is said to be 
on the country or city where the payment is to be made. 
Thus, exchange on London means the right, which may be 



184 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 94. 

possessed by a person in any part of the world, of requiring 
a money payment in London. 

In order that foreign exchange may have any value it is 
evident that there must be intercommunication between the 
residence of the creditor and the country where the debt is 
payable. A debt payable in the moon would have no value, 
even if by looking through our telescopes we could see the 
gold piled up and only waiting for the creditor to get it. But 
an American may buy goods in London, and he must then 
make payment in London. A credit payable in London will 
be of greater utility to him for this purpose than one payable 
at home, because it will save him the expense of transporting 
money to London. 

The ownership of foreign exchange is transferred by an in- 
strument in writing called a hill of exchange, of the same gen- 
eral character as a bank cheque, but usually more elaborate. 
Like a cheque, it consists of a formal order from the creditor, 
or drawer, to the debtor, or drawee, directing him to pay a 
specified sum of money to the order of a third person, called 
the payee. When this bill is transferred from the drawer to 
the payee, the latter becomes the owner of the foreign ex- 
change, with all the rights which pertain to that ownership.* 

The payee may reside in any part of the world without in 
any way impairing his ownership. But in order that the bill 
may become payable it has of course to be transferred to some 

* Owing to the danger of loss and delay in the transmission of bills when 
the only communication between countries was by sailing-ships or stage- 
coaches, it was customary to deliver bills of exchange in the form of three 
separate orders, called first, second, and third of exchange. This custom is 
still continued. The form of a bill of exchange is commonly as follows : 

Sixty days after sight of this my first of exchange {second and third of same 
tenor and date unpaid) pay to the order of, James Smith five hundred pounds 
sterling, value received, and charge the same as advised. 

Rhett & Co. 

To Messrs. Smith & Co., London. 

In the three orders the words first, second, and third are permuted, so 
that each is an order to pay provided the other two remain unpaid. 



II. 95.] FOREIGN EXCHANGE. 185 

person in the place of payment, which we may suppose to be 
London. This person presents it to the payee, who acknowl- 
edges the obligation of paying it by writing upon it an accept- 
ance. 

Foreign exchange may be transferred like any other credit. 
Exchange on London is bought and sold as if it were a com- 
modity in all parts of the world. To see its origin, suppose 
that an American merchant ships a cargo of goods to a London 
correspondent for sale. When the goods are sold, the corre- 
spondent becomes indebted to the shipper in the amount agreed 
upon. Thus the shipper in New York becomes the creditor 
of the firm in London. He can then draw a bill of exchange 
on his London correspondent, take it to a banker, and sell it 
for whatever sum it commands from the banker. The latter 
transfers it to his London banker by the usual indorsement, 
and the London banker collects the money from the payee. 
Thus the New York banker becomes the owner of the credit 
in a London bank. 

Now suppose that another American merchant desires to 
purchase goods in London. In order to pay for them he goes 
to the banker and asks him for a bill of exchange on London. 
A bill for the required amount is sold to him at any price that 
may be agreed upon, and is by him transferred to his London 
correspondent. The correspondent takes it to the London 
banker and receives payment. 

95. The advantage of this system is that much of the 
trouble and expense of transporting money backward and for- 
ward is saved. If every merchant in New York who bought 
goods in London had to send money over to pay for them, and 
every one who sold goods there had to bring his money home, 
the expense of transporting the money back and forth would 
be considerable. With bills of exchange it is only necessary 
to transport the excess of the sum total of debits over the 
sum total of credits. So long as the payments- to men in Lon- 
don balance the payment due from them, there will be a con- 



186 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 95. 

tirmal supply of bills of exchange in the hands of New York 
bankers, and an equal sale of them to merchants. But it some- 
times happens that the goods purchased abroad exceed those 
sold there. New York bankers then find that the quantity of 
bills of exchange which they sell exceed those which they buy. 
Consequently their credits in the hands of London bankers 
diminish and will soon be exhausted. To make them good 
they have to ship gold from New York to London to an 
amount sufficient to balance the account. But if the value of 
the American goods sold in London exceeds the value of those 
bought, the opposite effect will take place. New York bankers 
will find the amount of foreign exchange sold them to exceed 
that purchased from them, and their idle credits in the London 
banks will increase. Gold must therefore be transported from 
London to New York to pay the balance due the latter city. 

Of course the converse of what we have said holds true of 
New York in its relations to London. The merchants of the 
latter city buy and sell goods in New York, and may then 
have to make payment in New York. .Thus exchange on 
New York is bought and sold in London. 



11.96.] TEE VOLUME OF THE CURRENCY. 187 



CHAPTER XV. 

CONCLUSIONS RESPECTING THE VOLUME OF THE CURRENCY. 

96. A question of fundamental importance which now 
arises is, What should we regard as the sum total of the cur- 
rency of the country? We must begin by discussing a dis- 
puted question respecting the definition of the word " money " 
which arises from the want of an exact nomenclature. If we 
so far accept mercantile usage as to call by the general name of 
currency everything which men pass from one to the other in 
payment, we see that it comprises the following classes of 
things : 

I. Coined gold or silver. We have seen that, on the mone- 
tary system which has always prevailed, coined gold or silver 
must be the ultimate basis of everything that is used as money. 
Whatever form credit-money may take, it must, to be valid, 
consist in a right to receive or claim from some party a definite 
quantity of coin. A right to receive merely ideal money, or 
a representative of coin, amounts commercially to little more 
than the right of a hungry man to an ideal loaf of bread. This 
right may, however, as already shown, be more or less remote 
in time or place without destroying its value. 

II. Legal-tender notes. In the United States gold and sil- 
ver are to a certain extent replaced by promissory notes issued 
by the government, familiarly known as " greenbacks." At 
present these notes give the bearer the right to claim from the 
United States the amount of gold or silver coin named on their 
face. They have therefore the qualities of bank-notes, but 
differ from them in being a legal tender. This is the same 
thing as saying that every person paying them out may throw 
upon his creditor the expense and onus of having them paid. 
From 1862, the time when these notes were first issued, to 



188 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 96. 

1879, they were not payable in coin. In consequence their 
value was sometimes greatly below their nominal equivalent in 
coin. Since the resumption of specie payment by the govern- 
ment in 1879 they have been at par with coin. 

III. Bank-notes. The third kind of currency consists of 
bank-notes. These notes are now issued by all the national 
banks of the United States under certain limitations and re- 
strictions prescribed by law. They differ from greenbacks in 
that they are not a legal tender between individuals. The 
only parties responsible for their payment are the banks which 
issue them, though the government has taken very efficient 
measures to secure their payment. 

IV. Bank credits ; that is, the right to receive money from 
a bank, expressed by figures being written to the credit of the 
individual depositor in the books of the bank. 

Now, it is a disputed question whether anything but coin 
should be called money. This is a question of definition which 
does not admit of being absolutely settled, because anything 
may be called by any name which all agree upon. It is, how- 
ever, certain that the coined money which is the necessary 
basis of all currency should have a distinctive name. But 
instead of laying down a rule on this subject which might not 
be accepted by others, we shall simply try so to use words that 
in each case it shall be clear what is meant. We shall speak 
of "coin" or "coined money" whenever reference is made to 
this kind of money alone. 

Currency is something qui.te different, and may include all 
credits and money actually used in payments. At the same 
time, its actual meaning in commerce is very vague. Com- 
monly it means only material money, coin and notes in actual 
circulation. Sometimes it means paper money, in contradis- 
tinction to coin. We shall use it in a sense wider than either 
of these to designate everything, material or immaterial, which 
passes from hand to hand as money. 

The question now is, How shall we determine the total 
volume of the currency in dollars ? We have shown that the 



11.97.] THE VOLUME OF THE CURRENCY. 189 

volume of coined money in circulation is a definite quantity. 
We now want to know what this quantity becomes in the 
case of credits. First consider what the phrase " volume of 
the currency " means. The amount of currency possessed by 
any one man at any moment comprises the disposable funds 
which he has received in payment for services rendered, and 
which he can immediately pay out at his pleasure. It is 
that which he thinks of as " cash on hand " or " cash on hand 
and in bank." He may have it in three places — in his pocket 
in his safe, or in his bank. In his pocket or his safe it is 
simply so many dollars in coin and bank-notes. In bank it is 
simply so much credit ; he does indeed think of it as so much 
money in bank, but, as just shown, this is not so : it is not 
money, but credit. But this fact does not prevent its being 
counted by him and by every one else as so many dollars, nor 
abridge its power of performing all the functions of money. 

In the case of merchants who do business abroad on a large 
scale we may add that yet another form of currency is that 
of money or credit in the hands of correspondents. When a 
shipper sends a cargo of goods abroad and sells them, he may 
have the right to draw upon the consignee for payment. In 
this case he conceives himself to have so much money or credit 
in the hands of the consignee ; but since lie cannot pay this 
credit out to others with the same freedom that he can transfer 
a bank credit or a bank-note, it is not considered as a part of 
the currency. 

97. We have now to consider whether the sum total of the 
coin and bank-notes actually existing in the country should be 
considered as in circulation. The principles on which this 
question is to be settled belong to a more advanced stage of our 
subject, but the result can be stated here. Currency is to be 
considered in circulation only when it can be paid out by the 
owner at his own pleasure, and when he is keeping it for the 
purpose of payment. If he is gaining interest on it, and is 
keeping it with that object alone, it is not in circulation. What 



190 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 98. 

we assume as a condition of being in circulation is that, since 
the owner is gaining no interest, he will invest or expend it as 
soon as he can find an opportunity. This is the case with the 
o-reat volume of money which every one has on hand or in 
bank. 

One circumstance now comes in to make the question at this 
point a little indefinite. Banks and bankers, especially in 
Europe, often pay a small interest on their deposits, which our 
national banks are not allowed to do. When the depositor is 
receiving interest, this may induce him to leave his money in 
the bank instead of paying it out. But as the interest received 
is below the current rate at which money can be borrowed, we 
may consider this inducement as not sufficient to keep a large 
sum of money permanently out of circulation. 

We may now see that the coin held by a bank in reserve to 
make good its outstanding credits is not in circulation. It does 
indeed add to the circulation three or four times its volume by 
enabling the bank to give credit, but this credit we have already 
counted. Now, since the bank cannot and does not pay the 
coin reserve out at its own pleasure, this reserve does not belong 
to the class described. 

Nearly the same considerations apply to the funds accumu- 
lated in the public treasury. A volume amounting to several 
hundred millions of dollars is commonly kept in reserve in the 
vaults of the treasury. It can be paid out only in pursuance of 
law, and until so paid is not in circulation. 

The same rule might apply to the treasuries of the several 
States of our Union. The amounts held by them are not, how- 
ever, so great as to specially require their consideration. 

98. We therefore conclude that the total volume of the cur- 
rency may be obtained in this way : Add up all the coin in 
the hands of persons, all the legal-tender and bank notes in 
circulation, and all the bank deposits. The sum is the total 
volume of the currency. We do not include the coin held by 
the banks or the treasury as a reserve, because this is not in 



11.99.] THE VOLUME OF THE CURRENCY. 191 

circulation. If we know the total amount of coin in the 
country, we may find the amount in the hands of individuals 
by subtracting the bank and treasury reserves from the sum 
total. We may therefore find the volume by adding up the 
total amount of coin, bank-notes, and deposits, and subtracting 
the reserves held by the banks. 

Including bank credits as a part of the volume of the cur- 
rency is a precaution which is, unfortunately, seldom taken. 
Financiers generally include only coin and bank-notes in their 
official publications. But bankers know very well that the to- 
tal volume of the deposits is the most important factor of all, 
and the correctness of the student's ideas on the subject may 
be gauged by the clearness with which he sees that bank credits 
should be included as well as bank-notes. 

An illustration of this is afforded by a well-known feature of 
business in France. Statistics show that the amount of coin 
and bank-notes circulating in that country is larger in propor- 
tion to its population than in most others. The explanation 
of this is that the habit of keeping bank accounts and making 
transfers by cheque is less practised in France than elsewhere. 
Where an American business man would keep all his money in 
bank, and draw cheques for all payments, the Frenchman keeps 
bank-notes in his safe and pays them out to his customers. 

At the same time it should not be lost sight of that bank 
credits and bank-notes perform for the most part quite dis- 
tinct functions. The former are used principally in large 
transactions and in the great wholesale operations of com- 
merce. The latter are used in retail trade. 

99. The question has sometimes been raised whether bank 
cheques should not be considered as a part of the volume of the 
currency, since they pass from hand to hand in payment. The 
answer to this is that if we include them we must leave out 
the bank deposits which they represent. We must be careful 
always to count every credit once, but never to count it twice. 
Let us look at the matter more closely. John Smith has a 



192 DESCRIPTION OF THE SOCIAL ORGANISM. [II. 99. 

credit of $1000 on the books of the bank. He hands his 
neighbor a cheque for $500 of this amount. This does not in 
the slightest degree increase the bank credit ; it merely divides 
the ownership of it : one half now belongs to Smith, and one 
half to the drawee of the cheque. "When the latter transfers 
the cheque to a third party, this third party is the owner of the 
half of the credit, and so on indefinitely until the cheque is 
paid. 

But suppose an owner to deposit the cheque in some other 
bank. Then there is an apparent increase of $500 in the total 
credit, because the $1000 appears undiminished on the books of 
the original bank. So far as this original bank is informed, 
John Smith is still the owner of the whole $1000, while the 
other bank has $500 to the credit of an entirely different party, 
thus making a sum total of $1500. In reality, however, there 
is still no greater sum total of credit. Smith knows that he 
has only $500 and, being an honest man (else the bank would 
have nothing to do with him), acts accordingly. The remain- 
ing $500 is to the credit of another party in another bank. 
When the cheques are exchanged in the clearing-house the 
state of the case will be patent, and Smith's credit will be re- 
duced to $500. Since the sum total of credit remains un- 
changed by the drawing and transfer of the cheque, it would 
be a mistake to consider the cheque as an addition to the cur- 
rency. It is neither credit nor currency in itself, being only 
the instrument for transferring a portion of existing credit un- 
changed to another party. 



EXERCISES. 193 



EXERCISES. 

1. The bank described in § 81 engages successively in the following busi- 
ness transactions. "Write the statement of its resources and liabilities at 
the close of each transaction. 

A. It cashes a cheque for $3000 on another bank, paying coin for it. 

B. It then cashes a cheque upon itself for $4000 in coin. 

C. A customer then deposits a cheque for $2000 on another bank, and 
is credited with it. 

D. Another customer then deposits $1000 in coin. 

E. Its own notes to the amount of $2000 are then presented for redemp- 
tion. 

F. A mercantile firm then borrows $7000, and leaves it on deposit. 

G. Another firm then borrows $5000, and takes it in the bank's own 
circulating notes. 

H. A debtor to the amount of $2000 then pays Ms note in coin. 

Iu making these various entries, note that each separate transaction 
changes two, and only two, of the five items: Cash in vaults; Promissory 
notes on hand; Cheques on other banks; Deposits; Circulation. At the 
end of the last transaction the statement should be found as follows : 

Resources. Liabilities. 

Cash in vaults $34,000 Capital stock $15,000 

Promissory notes (discounts) 140,000 Due depositors 151,000 

Cheques on other banks. .. 5,000 Circulation 13,000 

$179,000 $179,000 

2. Show that the preceding transactions will have added $15,000 to the 
volume of the currency. 

3. If, after the last transaction, the bank should go into liquidation and 
wind up its business, show that the volume of the currency would thus be 
contracted by $130,000. 

4. Can you give any reasons for the following provisions of law regulat- 
ing the business of the national banks? 

That a national bank shall not hold real 'estate unless rendered necessary 
for the protection of its interests; 

That it shall not make any loan or discount on the security of the shares 
of its own capital stock, nor purchase its own stock; 

That it shall not pledge or hypothecate any of its notes or circulation for 
the purpose of procuring money to be paid in on its capital stock or to be 
used in its banking operations. 

5. Why do banks and bankers loan money only for short periods! 

13 



194 DESCBIPTION OF TEE SOCIAL ORGANISM. 

6. National banks were taxed a small percentage annually upon the aver- 
age amount of their deposits as determined each day. The Treasurer of 
the United States discovered that it made a great difference in the amount 
of the taxes whether the deposits were determined each day at the close of 
business, or whether the banks waited until the accounts were settled in 
the clearing-house the next morning before determining their deposits. 
Explain the source of the difference, and state which estimate was the just 
basis for the tax. 

7. It was once found that certain speculators in New York would go 
to a bank and borrow a large part of the legal-tender notes it had on hand, 
and, having effected the loan, leave the borrowed notes with the bank as col- 
lateral security for the payment of the loan. What effect had this proceed- 
ing upon the power of the bank to make loans to their customers, and at 
what expense to the speculators? 

8. If one should object that it is not consistent to include bank-notes in 
the volume of the currency, and exclude bank cheques, taking the ground 
that both perform the same functions, how would you explain the diffi- 
culty? 

9. F. A. Walker discusses at considerable length the question what should 
be considered money, and reaches the conclusion that coin and bank-notes 
are money, and that bank cheques are not money. He says nothing about 
bank credits in this connection. Show that there is no necessary connec- 
tion between a definition of money from his point of view and the question 
of volume of the currency discussed in Chapter XVI., because this volume 
does not involve his definition of money. (See his Money, Trade, and In- 
dustry, Chapter I. ; Capital and Money, Chapter XVIII.) 

10. If bank-notes or other forms of paper credit were used for all pay- 
ments from ten cents upward, in accordance with the principles of banking, 
in what respect would the requirements of the medium of exchange pointed 
out in § 63 be altered, it being assumed that the medium there described is 
the money lying in the bank to secure the payment of the notes? Are there 
any of the requirements which would then become unimportant? 

11. Consider the influence of the wear and tear of bank-notes upon the 
profit gained by their circulation. Does it favor the issue of large or small 
notes? , 

12. "In a period of depression there is just as much currency in the 
country as ever, but large sums lie in banks, and the rate of discount on call 
loans is exceedingly low." What kinds of currency are here spoken of? 
How does such a state of things affect the volume of credit-currency? 

13. "All the notes which represent the gold actually possessed by a bank 
are no addition to the capital of a country; but all the notes in circulation 
in excess of that, and which produce industry or which people in general 



EXERCISES. 195 

are willing to receive in return for their commodities or services, are a 
genuine addition to the capital of a nation." Criticise this use of the word 
capital. 

14. Is there most temptation to "wild-cat" banking where the rate of 
interest is high or where it is low ? 

15. If the current rate of interest should fall to one per cent per annum, 
what would he the effect upon the business of banking? Would it tend to 
increase or diminish the volume of credit-money? 

16. Are people most likely to melt down subsidiary coins, or coins of 
unlimited tender, when they want to use them as metal ? 

17. Show how, by suspending specie payments, the power of a bank to 
loan money was increased. 

18. When our imports from England exceed our exports, will the bankers 
of New York find the amount of foreign exchange offered them or that 
demanded from them in excess? 

19. "Of the money daily used a very small percentage is bank-notes. 
The great bulk is cheques, drafts, and telegrams. The telegraph transmits 
millions upon millions of bank credits from Boston to New York, Chicago, 
London, etc., etc., and the reverse, where the telegram is the only money 
used." Criticise. If instead of telegraphing a man should telephone, would 
liia words be money? — Professor Sumner. 

20. A banker " may be only just able to pay what he owes to others and 
yet be, so long as his credit lasts, a wealthy man. Suppose that he owes 
$1,000,000 (without interest) [deposits, etc.], and has debts of merchants, 
railway companies, and the government which together could be sold for 
$1,000,000. If there were a run on the bank and he had to suspend pay- 
ment, his wealth would be found equivalent to zero; but meanwhile he ob- 
tains the interest on $1,000,000, which will leave him a handsome surplus 
after paying the expenses of tbe bank. And since there is no reason why 
he shall not continue to enjoy this surplus for an indefinite period, his 
business might obviously be sold for a considerable price, even though its 
assets did not balance its liabilities, provided that the sale were a secret 
one, so that its credit could be maintained." Could a banker do business 
on such a basis? Would he add to the wealth of the country? 



BOOK III. 

THE LA.WS OF SUPPLY AND 

DEMAND. 



BOOK III.— TEE LAWS OF SUPPLY AND 
DEMAND. 



CHAPTER I. 

THE CONCEPTION OE VALUE. 

1. Value lias already been denned, and the method of 
measuring it described. We have now to consider value as 
expressing a certain relation between men and their wants as 
the one term, and wealth and its capacity for gratifying those 
wants as the other term. 

The Conception of Value. The conception of value as a 
quality admitting of measurement offers peculiar difficulties 
to the student, owing to its intangible character. No one has 
any difficulty in conceiving of length, area, weight, tempera- 
ture, and other physical qualities, because these qualities may 
all be made evident to the senses. But in the case of value 
we have nothing that is evident to the senses. One may be 
given a barrel of flour, and furnished with the most perfect 
means of measuring all its physical properties, without being 
able to form any estimate of its value. The latter will in fact 
depend on where the flour is, and how much people have to 
eat either where it is now or where it is to be taken to. 

It follows that value is not a quality inherent in the com-i 
modify, but depends upon the relation of the latter to the 
persons desiring it. Things have no value unless they are in 
such a position that those who desire them can command them. 
If a barrel of flour were buried a hundred feet under the earth, 
it would, under present conditions, have no value, though not 
a single one of its physical properties might have suffered. 

Many definitions of value have been given ; it is called 



200 TEE LAWS OF SUPPLY AND DEMAND. . [III. 2. 

"Cost of production," "Cost of reproduction," "Estimate of 
resistance to be overcome in order to command the commod- 
ity," etc. These and many other definitions are useful in 
suggesting a simple idea which hardly admits of an entirely 
satisfactory formal definition. We may regard value either 
as intensity of desire or as utility. When a man pays $5 
for a barrel of flour, we may assume that his desire for 
that barrel of flour is a little greater than his desire for $5, 
and that the desire of the grocer is a little less. Taking an 
average, the general desire is equal to that for the money. If 
the value of a commodity A is $2, that of B $7, and that of C 
$100, we may imagine that people in general desire these 
three commodities with intensities proportional to 2:7: 100. 

We may also say that the value of a commodity in the mar- 
ket is its utility to those who purchase it. This definition 
agrees with the other, because utility, in economics, means 
capacity for satisfying desire ; and, when we suitably restrict 
the meaning of our terms, we may say with logical correctness 
that intensity of desire on the part of the person, and capacity 
of satisfying that desire on the side of the commodity, are 
equal. But the word utility has another application which we 
must distinguish from the present one. 

2, The Economic Conceptions of Utility and Value. Econ- 
omists have claimed that, although utility is necessary to value, 
it alone does not suffice to give value ; for example, that the 
utility of iron far exceeds that of gold, although gold has a 
higher market value. Again, air is far more useful than either, 
since we should die without it ; yet it has no value whatever. The 
rule was therefore laid down that value depended not only on 
utility, but on difficulty of acquirement ; that which could be 
acquired without labor having no value, how great soever its 
utility. Thus arose the conception of two kinds of value — 
value in use, or utility, and value in exchange, or market value. 

The two Categories of Things in which Utility inheres. We 
shall now show that " value in use" and " value in exchange" 



III. 2.] THE CONCEPTION OF VALUE. 201 

are not in reality two distinct kinds of value, but rather the 
same kind of value inherent in two distinct categories of things. 
The one category is that of things in general, as gold in general, 
iron in general, and air in general. The other category is that 
of particular things — the cargo of iron which has just arrived 
in port ; a particular ingot of gold ; the air which one is at 
the moment breathing. 

Utility in the two Categories. When we say that iron is 
more useful than gold, we do not mean that a single bar of 
iron really possesses higher utility than a similar bar of gold 
would. "What we mean is that iron in general, or all the iron 
in the world, is more useful than gold in general, or all the 
gold in the world. But a single bar of iron is, under the actual 
conditions in which men are placed, less useful than a bar of 
gold, for the simple reason that if the bar of iron were lost or 
annihilated there are plenty of other bars to take its place ; 
whereas there are not plenty of bars of gold. 

It might be said, in reply to this, that the fact of there being 
plenty of other bars of iron does not really lessen the value or 
importance of the service rendered by any particular bar, and 
that it is this service considered in itself which determines the 
utility of the bar. But a little consideration will show that we 
cannot make this kind of utility, that is, the utility of things or 
services in themselves, the subject of any precise thought or 
estimate. If we tried to do so, we should conclude that the 
utility of everything which supports life is infinite. For ex- 
ample, in travelling by rail, we might say that the utility of 
every separate rail over which we pass is infinite, because it 
keeps the train in which we ride from destruction. It is clear 
that such a conception of utility cannot be exactly measured. 

The more reasonable definition is this : The utility of an ob- 
ject is measured by the disadvantage which we should have suf- 
fered if the object had never existed. Adopting this definition, 
the utility depends not merely on what the object does for us, 
but on what would have happened if the object had not existed. 
Now, if the bar of iron were non-existent, we should merely 



202 TEE LAWS OF SUPPLY AND DEMAND. [III. 3. 

have been put to the labor and expense of making another bar 
to take its place. So it is this labor and expense which measure 
its utility, as well as its market value. And every one knows 
that this labor and expense would be far greater in the case 
of a bar of gold than in that of a bar of iron. 

Value in the two Categories. On the other hand, if we 
attempt to assign a market value to air, or iron in general, 
we shall find it to correspond to the utility. If the inhabitants 
of the planet Mars should offer to purchase our atmosphere, 
they would find that the market value we set upon it would be 
infinite, because to part with it would be instant death to the 
inhabitants of this planet ; hence the " value in exchange" of 
air in general is not zero, but is rather infinitely great. Again, 
if the inhabitants of Mars should offer to purchase all the iron 
on our planet with an equal weight of gold, we should not ac- 
cept the offer. That is, iron as a sum total has a higher market 
value as well as a greater utility than gold as a sum total. 
There is therefore no objection to defining the value of com- 
modities as equivalent to their utility, provided that we always 
attach the correct idea to the word utility. But utility will 
then be identical with value. 

3. This principle is closely related to an improved theory of 
value formulated by Professor Jevons. Consider a man in a 
situation where the command of food is difficult or uncertain. 
A daily supply of a pound of bread will be of the greatest 
value to him ; to secure it he would give all his time if neces- 
sary. It would be of equal utility, because it would keep him 
from starving. The addition of a second pound per day would 
be of less utility, and would also have less value. If he were 
offered a third pound per day, the value and the utility would 
both be still smaller. If the loaves offered went on increasing, 
a point would soon be reached when he would prefer some- 
thing else than food, say clothing. The utilities of successive 
supplies of clothing would go on diminishing in the same way. 
If the supply were houses of increasing size, their utilities 



III. 4.] THE CONCEPTION OF VALUE. 203 

would go on diminishing. A point would thus arise in the 
case of each and every commodity at which the utility of an 
additional portion would he so small that it would be indiffer- 
ent whether a person did or did not undergo the labor or 
privation necessary to command it. This Mr. Jevons calls 
final utility. Thus final utility is synonymous with value 
which is measured by price. 

Now, what is ordinarily bought and sold in the market are 
not sums total comprising the whole of any commodity which 
exists, but little portions each of which is insignificant along- 
side of the whole. It is therefore with final utilities alone 
that the operations of commerce and the laws of economics are 
commonly concerned. 

4. It is sometimes said that economics has nothing to do 
with anything but this market value, and knows no other meas- 
ure of value. Although this is true in the generality of cases, 
it is a grave mistake to regard it as universal. In any case 
where the question is one respecting the effect of a material 
increase or diminution in the supply of an article, the benefit 
or injury cannot be expressed by the market value of small 
portions. For example, the injury and suffering which would 
be inflicted on mankind by a general failure of the crops is 
not to be measured by the market value lost. In fact it would 
be found that the value of a short crop would exceed that of 
an abundant one. So with capital. The utility to non-capital- 
ists of all the capital accumulated by others is incomparably 
greater than the interest they pay upon it. This principle is 
of special importance in all cases where the question at issue is 
that of a general policy which will tend to change quantities 
total of any product. If all the laborers of the country should 
combine together to materially change the conditions of pro- 
duction, the corresponding change of value would afford no 
criterion of the benefit or injury to society. This limitation 
upon the doctrine of value will have important applications. 



204 THE LAWS OF SUPPLY AND DEMAND. [III. 5. 

5. Value has a relation to human needs which, although 
commonly simple enough, is sometimes seriously misunderstood. 
Its origin depends on two factors, which must be kept separate 
in thought. These factors are (1) need on the part of man, 
and (2) capacity to gratify that need on the part of the wealth 
valued. To a man who is as happy as he can be and wants 
nothing, no wealth can have any value. It is only when he 
needs to better his condition that value arises. The result of 
this is that increase of value may imply not only an increase of 
power to gratify our needs, but also an increase of those needs. 
By making a man very thirsty and cutting oil his water-supply 
we give value to water. By threatening to inundate him with 
the Mississippi River we give value to the dikes which keep 
that river from overflowing his fields. By clearing away the 
forest we give greater value to the limited quantity of wood 
that remains. By adding more people to the number who must 
be fed from one farm we increase the value of the farm and 
everything upon it. A cold climate increases the value of 
houses, shelter, and clothing. 

The result of all this is that although value is the measure 
of wealth, it is very dangerous to take it, as is often done, as 
the measure of human welfare. It may equally be the measure 
of the increase of human necessities, and it is very difficult to 
draw an exact line between the two cases. It is only when we 
compare two different values in cases where men are similarly 
situated that we can say whether the difference between the 
values corresponds to the difference of general welfare. If we 
should find by comparing the two States of Ohio and Indiana 
that the wealth of one far exceeds that of the other in pro- 
portion to its population, we might fairly conclude that the 
inhabitants of the wealthier State were on the whole better 
off. But we could not make a similar comparison of the 
people of Switzerland with those of Minnesota, because the 
necessities of the former lead them to assign a higher value to 
roads and fields than these objects possess in Minnesota. 



III. 6.] THE ABSOLUTE STANDARD OF VALUE. 205 



CHAPTER II. 

THE MEASURE OF VALUE BY AN ABSOLUTE STANDARD. 

6. "We have to introduce certain mathematical conceptions 
into this subject. One of the most common of these is that of 
one quantity varying directly or inversely as another quantity. 
A simple example is that of total cost varying directly as price 
per unit. If I have to buy a box of tea, then the higher the 
price per pound the more I must pay for the box. , This rela- 
tion is expressed algebraically by saying that the money I must 
pay for the tea is equal to the product of the price into some 
fixed quantity. 

Let M = the total amount of money I must pay ; 
P = the price per pound. 
Then the law of relation is expressed by the equation 

M=PXC. (a) 

C being the constant quantity. When we say that C is a con- 
stant quantity, we mean only this, that it does not necessarily 
vary when P varies, or that we suppose it constant in order to 
get a relation between P and M. In the present example we 
can readily see what C is. It is the number of pounds of tea 
in the box. If this is 120, then we have for the cost of the tea 
M = Pxl20. 

To take another example, let us inquire what sum total of 
values can be exchanged by a piece of money in a year. Let 
us put 

E, the total amount of exchanges required ; 

D, the number of dollars in the coin ; 

~N, the number of times that the coin changes hands in the 
course of the year. 

It is evident that the higher the value of the coin — that is, 



206 THE LAWS OF SUPPLY AND DEMAND. [III. 7. 

the greater the value of D — the greater the value of the ex- 
changes it will effect, other conditions being equal. Hence 

we may write 

E = DxC. 

A very little consideration will show that the constant C is 
equal to ~N, the number of times the coin changes hands in a 
year. The relation between the three quantities is therefore 
expressed by the equation 

E = DxK (&) 

We may therefore also say that the quantity of business 
which a coin will transact in the course of a year is proportional 
to the number of times it changes hands. 

7. Inverse variation comes into play when one quantity in- 
creases as another diminishes. If I have a fixed sum of 
money, it is evident that the higher the price per pound of an 
article the less of that article my money can buy. This rela- 
tion is expressed by saying that the amount I can buy is equal 
to some quantity divided by the price per pound. Using the 
same notation as in the first example (a), and putting Q for 
the quantity I can buy, we shall have in this case 

Here it is evident that C represents the fixed sum of money 
which I have to buy with, the same as M in the first example. 
From equation (b) we derive, by an algebraic operation, 

*=£■ 

This equation expresses the fact that if a certain definite 
amount of business is to be transacted by a coin, then the 
smaller the value D of the coin the greater the number of 
times it must change hands.* 

* It may appear to the student that we are here explaining a simple matter 
in a complex way, since the results are plainer than the reasoning. This is 
true. The ohject is to illustrate a principle which we shall have to apply in 



III. 8.] TEE ABSOLUTE STANDARD OF VALUE. 207 

8. In all the above cases it is obvious what the constant 
quantities mean. But sometimes, although we may form a defi- 
nite idea of these quantities as constants, their meaning depends 
upon a great many conceptions. One of these conceptions, 
which we must have at command, is that of a scale of prices. 
Suppose that the price of everything next year should be dou- 
ble its price this year. Then, other conditions being equal, 
double the amount of money would be required to buy and sell 
the same goods, since the amount of money required for each 
purchase necessarily varies as the price. By a scale of prices 
is meant a general average of prices of all goods bought and 
sold. If this average of prices increases, we say that the scale 
of prices increases, and vice versa. Let us call the scale S, and 
let us put M for the amount of money required to make all the 
exchanges. Then, since the higher the scale the greater the 
amount of money required, we may write the equation 

M = S X C, (c) 

being some Constant. 

What this constant is depends upon a great many causes ; 
one of which is the total amount of commodities to be bought 
and sold. It also depends upon what standard of comparison 
we take for S ; that is, for what scale of prices we regard S as 
equal to unity. But in this case all that is necessary is to ad- 
here to a scale when once adopted. For example, the scale of 
prices was about twice as high in 1864 as it was in 1861. 
Hence it required twice as much money to transact a given 
amount of business in 1861 that it did in 1861. If we call the 
scale of 1861 unity, that of 1861 will be 2. If we call that of 
1861 unity, we had in 1861 S = £. 

It is evident that the constant quantity in equation (c) de- 
pends upon and varies with the total amount of business to be 
transacted. Therefore if we put 

the future, namely: Whenever one quantity varies as another, the one may be 
considered as equal to the product of the other into some third quantity. Con- 
versely, if one quantity varies inversely as another, it is equal to the quotient of 
some third quantity divided by the other. 



208 THE LAWS OF SUPPLY AND DEMAND. [in. 9. 

B = the total amount of business, 

we may write 

C = BxK, 

K being some other constant quantity. 

If we substitute in equation (<?), the latter will become 
M = SxBxK, 
which means that the quantity of money required will vary 
both as the scale of prices and the amount of business to be 
transacted. 

In all cases of this sort we may consider the algebraic sym- 
bols as the measures of certain economic causes. The effects 
of these causes will then be studied by supposing some one 
cause to vary while all the others remain constant. Thus we 
shall get the effect of the variation in that particular case. By 
considering each of the causes in succession to vary, we get the 
effects due to the variation of all the causes. The last equa- 
tion is an example of introducing two varying causes, scale of 
prices and quantity of business. 

9. Suppose the price of everything to be twice as high 
this year as last, while the quantity produced remains the 
same. In ordinary language, it would be said that all values 
had doubled. But it is clear that really nothing would have 
been any more valuable or useful than before. The measure- 
ment of values by prices is therefore not entirely satisfactory. 
To illustrate the exact nature of the defect, let us suppose an 
analogous case in measuring length. On getting up some morn- 
ing, a father measures the heights of his children with what 
purports to be a foot-rule. He finds that the boy who yester- 
day only measured four feet now measures eight. Marking 
his own height, he finds it to be eleven feet. He might claim 
that his entire family was twice as tall as yesterday, and that 
he was himself a giant. But the more reasonable explanation 
would be that his supposed foot-rule was only one half its 
proper length, and that the actual size of everything else re- 
mained unchanged. 



III. 10.] THE ABSOLUTE STANDARD OF VALUE. 209 

Now the measure of values by money is, in principle, simi- 
lar to the measure of lengths with a rule. When we say a man 
is six feet high, we mean that his height is equal to six of a 
certain length which we call a foot. So when we say that a 
barrel of flour is worth $5, we mean that its value is equal 
to five pieces of money each of which we call a dollar. In 
order therefore that we may never be deceived in actual values, 
both the foot and the dollar with which our comparisons are 
made must remain unchanged. There is no difficulty about 
the foot, because it is a material substance, and we can readily 
find matter which does not vary in its magnitude from year to 
year. But since value is only a mental conception, and depen- 
dent upon human desire, there can be no absolute dollar to 
compare with. The current dollar may be variable in value, 
as well as a barrel of flour, and we must always remember that 
calling a thing, whether metal or paper, one dollar, or one pound, 
or one franc, no more gives it a fixed value than calling a stick 
one foot makes it a foot long. 

10. Is there then any way by which we can approximate to 
a real standard of value ? To show how we may reach such an 
approximation, let us again return to the case of the foot-rule. 
It is very evident that in the case we have supposed, that of a 
man finding himself twice as tall as he was before, common- 
sense would tell him that the rule with which he measured was 
only half as long as before. In other words, the logical pro- 
cess would be to measure the rule by the heights of himself and 
children instead of measuring them by the rule. If he found 
that yesterday the combined measures of himself and of his 
children were 16 feet, while to-day they all together measured 20 
feet, he would conclude that the rule to-day was shorter than it 
was yesterday in the ratio 20 : 16, or that it had shrunk 20 per 
cent. This result would indeed rest on the assumption that 
there was no actual change in the heights of the family, and 
whatever error this assumption might be subject to, the same 
error would his result be subject to. It is evident that in the 
H 



210 THE LAWS OF SUPPLY AND DEMAND. [III. 11. 

case supposed the errors arising from this assumption would be 
much less than that arising from the supposition that the length 
of the measure was invariable. 

In the same way, in devising an absolute standard of valne 
the most logical process is to suppose that the general or aver- 
age values of commodities remain unchanged from year to year, 
and that a general rise or fall in prices is caused by a diminu- 
tion or increase in the value of the dollars in which the price 
is expressed. Now, if the changes thus indicated were the 
same with all commodities, that is, if all prices rose or fell ex- 
actly in the same proportion, there would be no difficulty. But 
as a matter of fact we never find this to be the case. We must 
therefore seek for some general average which shall be as near 
as possible to what we want. One possible hypothesis would 
be this : We might assume that the absolute value of every- 
thing produced by the population of the country remains un- 
changed except that as population increases the total value 
produced increases in the same ratio. In other words, we 
may suppose the average productiveness of each individual to 
remain the same from year to year. 

If then we could determine the total money value of all that 
is produced by all the inhabitants of the country, and divide 
the result by 60,000,000, or such other number as might ex- 
press the total population, we should have for the quotient a 
certain number of dollars which would be the average produc- 
tiveness of each individual, measured in current money. If we 
found this average to fluctuate from year to year, we should 
conclude that it was due to changes in the value of the dollar 
with which the value produced was measured. 

11. The Tabular Standard of Value. As a matter of 
fact it is impossible to determine the total productiveness as 
just defined with any approach to accuracy. We cannot learn 
what every man is doing or making by any system of inquiry. 
The next best course is to take as our standard of comparison 
the value of a certain number of the great staples of life. 



III. 11.] THE ABSOLUTE STANDARD OF VALUE.. 



211 



Flour is one of these. In the city of New York a barrel of 
flour which sold for $5 in the year 1S83 would only bring 
$4 in 1885. If we regard tho value of the dollar as in- 
variable, we should say that the value of the flour was 20 per 
cent less in the latter year than in the former. But if we 
regard the value of the flour as invariable, then we should say 
that the value of the dollar was 25 per cent greater in 1885 
than in 1883. 

Instead of depending on flour alone for a comparison, we 
should take all commodities which are consumed in appre- 
ciable quantities. The table below will show the method bet- 
ter than any amount of description. We have here a list of 
twenty articles of nearly universal consumption. Of each ar- 
ticle we take what we may suppose to be a rude approximation 
to the quantity which a person may consume in a year. To 
discover the actual average amount consumed by each person 

Table showing the Price op a certain Collection of the Neces- 
saries of Life, at New York, in the Years 1876, 1880, and 1884. 





1876. 


1880. 


1884. 


1 barrel corn-meal 


$3 68 

12 43 

7 72 

7 65 
5 53 
2 58 

8 90 

34 

1 34 

5 60 

9 00 
10 60 

7 20 

2 80 

6 12 
2 84 
36 

10 70 

2 98 

3 30 


$3 80 

11 76 

7 78 

7 40 

3 47 
2 30 

7 52 

30 
2 06 

4 68 

8 80 

6 20 

5 10 

1 60 

7 50 

2 92 
30 

9 00 

2 98 

3 80 


$3 24 


2 barrels flour 


11 18 


1000 bricks 


7 59 


500 feet lumber 


8 53 




4 70 


20 lbs. cotton 


2 10 




9 16 


2 cwt. ice 


23 


1 cwt. pig-iron 


1 28 


100 lbs. beef 


4 80 
9 90 


100 lbs. pork 


7 90 


30 lbs. butter 


5 40 




2 10 




6 75 




2 40 




39 




7 10 




3 58 
3 00 






Total 


$111 66 


$98 27 


$101 33 







212 THE LAWS OF SUPPLY AND DEMAND. [III. 11. 

would be a difficult problem, and the quantities in the table 
must be considered as only rude guesses, the object being to 
illustrate the principle and not to give a fact with the utmost 
exactness. With each article is given the cost of the assumed 
quantity from the wholesale price in the city of New York at 
certain periods separated by four years. The numbers given 
are the averages during the years ending June 30th, of 1876, 
1880, and 1884. The prices are taken from the reports of the 
Bureau of Statistics of the Treasury Department. 

Adding up the several columns, we find that the collection 
of commodities described in the table cost $111.66 in 1876 ; 
$98.27 in 1880 ; and $101.33 in 1884. 

We now proceed on the supposition that the real value of 
this collection of articles remains unchanged. But when meas- 
ured in dollars the value was less by 12 per cent at the second 
epoch than at the first. From this it would follow that each 
dollar was worth about 13 per cent more in 1880 than in 1876. 
From 1880 to 1884 there was a slight increase in the amount 
of money necessary to purchase the collection. We therefore 
conclude that during that period there was a slight deprecia- 
tion in the value of the dollar. It is probable that since 1884 
the value of the dollar has again been slightly increasing, so 
that less money would purchase the collection now than was 
reqnired during that year. 

To perfect this table many additions and modifications are 
necessary. We should include the rate of wages paid to vari- 
ous classes of laborers whenever it can be exactly determined. 
But in estimating the rate of wages it would be necessary to 
take into account the unemployed as well as the employed. 
Suppose, for example, that out of ten carpenters eight were 
getting $2 per day, while two were unemployed. Then the 
average wages of the carpenters would be $1.60 and not $2. 
The wages of domestic servants, washerwomen, and other 
classes who render personal services would also have to be 
taken into account. Manufactured articles, clothing for ex- 
ample, should be more fully represented. 



ni.ll.] THE ABSOLUTE STANDARD OF VALUE. 213 

One source of error in drawing conclusions from such a table 
can be more easily seen than avoided. The improvements con- 
stantly being made in manufactures lead to their being really 
cheaper when measured in terms of human labor, which is our 
proper ultimate standard. This improvement should be allowed 
for, if possible, by increasing the quantities in our standard col- 
lection. 

As a general rule the changes of value to which our current 
dollar is subject are very little noticed or considered by the 
public at large. Yet, as we shall hereafter see, nothing is more 
essential to enable us to' understand the condition of the social 
organism than this knowledge. The value of the dollar ought 
to be determined from month to month by some central au- 
thority and made known to the public. 

It will be remarked that the changes in the amounts of 
money necessary to purchase the tabular collection of com- 
modities correspond to the changes in the general scale of 
prices defined in § 8. The relation between this scale and 
the absolute value of the dollar may be stated as follows : 

The absolute value of the dollar varies inversely as the 
scale of prices. 

It should also be remarked that the conception which we 
have called " absolute value of the dollar" is frequently called 
" purchasing power." This popular form of expression is well 
adapted to give a clear notion of the subject, since any one un- 
derstands how a dollar may purchase more at one time than at 
another. 

Both the scale of prices and the purchasing power at any 
time may be represented by numbers, the values of those 
quantities at any arbitrary epoch being taken as unity. Thus 
we should have, taking 1880 as unity : 

. 1876. 1880. 1884. 

Scale of prices 1.14 1.00 1.03 

Purchasing power 0.88 1.00 0.97 

A standard of value fixed in this way, by the prices of com- 
modities, has been called a tabular standard of value. 



214 TEE LAWS OF SUPPLY AND DEMAND. [III. 12. 

12, It lias been proposed to adopt a tabular standard of 
value as that for tbe payment of debts which are due only at 
the end of long periods of time. The public debts of the prin- 
cipal nations of the world have gone on for several generations; 
ground-rents in our great cities have sometimes been continued 
for a hundred years or more. In these cases the essential condi- 
tion of the contract is that, in consideration of a service rendered 
at one time, the party receiving it agrees to pay a sum of 
money at some distant future time. The objection to this sys- 
tem is that no one knows what the absolute value of the money 
will be when the time of payment comes. We know as a mat- 
ter of history that great changes in the value of the monetary 
unit have occurred, and can sometimes trace their causes. The 
great additions to the gold supply of the world made by the 
discovery of gold in Calif ornia and Australia in 1848 and 1850 
resulted in a diminution of the value of the dollar. Hence 
when old debts were paid during the few years preceding 1860, 
the creditor received a less value than he supposed he would 
get. During our civil war paper dollars were issued in such 
quantities that their value fell to one half that of the gold 
dollar or less. One half of all old debts payable during 1864 
may be said to have been forfeited. During the years 1865 to 
1880 there appears to have been a pretty steady appreciation in 
the dollar. The result was that everybody who during the 
years 1863 to 1865 contracted debts payable now has to pay 
double the value on which he based his agreement. 

Now, one object of the tabular standard of value is to ar- 
range an equitable system for the payment of such debts. This 
system is in brief that of providing that the payments shall be 
made, not in so much gold, silver, or other current money, but 
shall consist of such a quantity of the current money as shall 
purchase a stipulated collection of commodities. 



III. 13.] THE RELATION OF PRICE AND DEMAND. 215 



CHAPTER III. 

THE RELATION OF PKICE AND DEMAND. 

13. The laws which we have to consider in this chapter are 
so wide-reaching in their operation that they may be justly re- 
garded as the fundamental ones of economic science. In ac- 
cordance with a general principle of scientific method, we have 
to begin the study of these laws by showing how they operate 
in the simplest cases. What these cases are will be seen by 
recalling the principal industrial and commercial operations as 
they have already been described. These operations consist, 
in brief, in producing goods, taking them to market, and sell- 
ing them to persons who want to use them. In the case of 
most products a number of sales are necessary, because nearly 
every person who makes anything has to buy the materials 
with which to make it, and after it is made it may pass through 
several owners before reaching the final consumer. The sim- 
plest case which will include all the elementary operations is 
that in which a commodity is made by some producer, brought 
to market, sold by the producer to a dealer, and by him to the 
person who is to consume the commodity. In this case there 
are two exchanges. The difference between the prices at 
which the two sales are made will represent the profits and ex- 
penses of the dealer. 

Let us take the purchase and sale of flour as an example. 
In accordance with what has been said, we have three classes 
of people to deal with : 

I. Producers of flour. These producers actually comprise 
farmers, millers, and dealers. But, to make our first considera- 
tion as simple as possible, we shall combine them all together in 
the persons of the one class who bring the flour to market and 
sell it. 



216 THE LAWS OF SUPPLY AND DEMAND. [III. 13. 

II. The dealers who purchase the flour from the producers. 

III. The consumers of flour, who purchase it from the deal- 
ers in order to make it into bread for consumption. 

Still further to fix the ideas, we shall take the city of New 
York as an example of a market. In and near this city there 
is a population of some 2,000,000 to be supplied with flour. 
Then the classes of people above described will be, firstly, 
those who are bringing flour to New York for sale; secondly, 
the dealers who purchase it at wholesale ; thirdly, the two 
millions of people who are buying it from the dealers to eat. 

There are in reality many grades of flour, and the prices of 
different grades will differ. But, to make our first example as 
simple as possible, we shall suppose but a single average grade. 

Since the dealers are the owners of all the flour they sell, or 
act as agents of the owners, we may consider them at liberty 
to charge what price they please. But the quantity which 
they can sell depends upon the price they charge. The rela- 
tion between the price and the sales may be called the law of 
price and demand, and is such that the higher the price the 
less the quantity which can be sold. 

The reason of this law is that every rise in price will lead to 
economy and retrenchment on the part of consumers. The 
diminution in the amount sold arises in two ways: 

Firstly, by leading consumers to be more economical in the 
use of flour, eating and wasting less bread. 

Secondly, by leading' them to employ substitutes for flour, 
such as corn-meal, oat-meal, or potatoes. 

We readily see that the diminution in the consumption aris- 
ing from an increase of the price will be different with differ- 
ent classes of consumers. The wealthy do not take any account 
of the price of flour in determining whether they shall or shall 
not eat bread. The lower we descend in the scale of wealth 
the more rigorous the economy which must be practised, and 
the greater the diminution in consumption which will be caused 
by a rise in price. 



III. 14.] THE RELATION OF PRICE AND DEMAND. 211 

14. We now Lave the following definitions of certain words 
which will be in almost constant use. 

P By market is meant a place or region where one or more ! 
(commodities are bought and sold on a large scale. Chicago 
)and New York are great wheat marketsJ- Many thousands of 
farmers in the Northwestern States send their wheat to the 
former city for sale, while American and European dealers pur- 
chase wheat or flour in New York. The essential feature of a 
market is that the price of the commodity is publicly known, 
so that everybody knows very nearly at what price other peo- 
ple are buying and selling. 

By the supply of a commodity is meant the quantity of 
that commodity brought to any market for sale. For example, 
if we find that there are to-day 100,000 bushels of wheat in 
Chicago awaiting purchasers, we might say that the supply to- 
day is 100,000 bushels. But it is better to consider the supply 
as the total quantity brought to market for sale in the course of 
a year, or other unit of time, rather than as a stock on hand. 

By the demand for a commodity is meant the quantity 
of that commodity which can be actually sold in any market at 
any given price during a year or other unit of time. 

We must carefully distinguish between this economic signifi- 
cation of the term demand and the popular one, which merely 
implies desire to purchase. No amount of mere desire for a 
commodity is sufficient, in itself, to constitute a demand. The 
latter arises only when the person desiring has the means as well 
as the willingness to purchase. " There is no demand, economi- 
cally speaking, in the hungry eyes of a penniless boy looking 
at tarts through a pastry-cook's window. Without pennies an 
unlimited longing and passion for their consumption would not 
permit that boy to contribute aught to the demand for tarts." 

Introducing the word demand, the law of price and demand 
which we have already mentioned may be expressed as follows : 

First Law: Other conditions being equal, demand varies 
with price in such a manner that as the price increases demand 
diminishes, and vice versa. 



218 THE LAWS OF SUPPLY AND DEMAND. [III. 15. 

Universal Applicability of the Law of Price cmd De- 
mand. The law of diminished demand with increased price 
applies not only to goods bought and sold in market, but to 
every form of service for which people pay money. If hack- 
men charge too much for the use of their carriages, fewer peo- 
ple will employ them and more people will walk or take the 
street-cars. If a theatrical manager puts the price of his 
tickets too low, more people will apply for them than the thea- 
tre will hold ; if he sets the price too high, some of the seats 
will be empty. If bricklayers demand higher wages, fewer 
people can afford to build houses. By lowering their wages 
the number of people who can afford to employ them is in- 
creased. When a Washington newsboy finds the day passing 
away without his supply of New York papers being disposed 
of, he lowers the price from five to three or two cents, know- 
ing that he may thus sell at a low price papers which he would 
otherwise have to lose entirely. 

15. Sensitive and Insensitive Commodities. Let us next 
inquire whether we can make any approximate estimate of how 
much the demand will fall off with a given increase of price. 
First let us see why it falls off at all. The reason is that the 
income of people in general is limited. If, therefore, prices 
rise without any general increase of income, it will be impossi- 
ble for individuals to purchase the same amount of everything 
as before. The fundamental question we have been consider- 
ing is, How will demand vary with price, all other conditions 
being equal ? Among the other conditions which, by hypothe- 
sis, remain equal are the incomes of the purchasers. Since, 
then, each man has an equal amount of money to spend whether 
the price be high or low, the sum total w T hich he 'can purchase 
with his money will vary inversely as the price. For instance, 
if prices should all be doubled, he could purchase on the aver- 
age only half as much as before. We may now reasonably 
suppose as an average rule that the result will be the same for 
each separate commodity that it is for things in general; that is, 



III. 15.] TEE RELATION OF PBICE AND DEMAND. 219 

that the quantity sold or demanded will vary inversely as the 
price. For example, if it is a question of how many peaches a 
man will purchase for his table, we may suppose that each per- 
son will be willing in the course of the summer to reserve a. 
certain definite amount of his income for buying peaches. 
Then if the price is one half the usual one, he will buy twice 
as many as before ; and if it is double, he will buy one half as 
many. 

However sound this rule may be in its application to the 
general average of all the things exchanged, we cannot suppose 
it to be true of each commodity considered separately. For 
both as a matter of fact and by reason we know that the de- 
mand for some commodities will fall off much more than that 
for others in consequence of a given increase of price. We 
need words to express these differences, and therefore shall 
adopt the following definitions : 

Sensitive commodities are those the demand for which falls 
off most when the price is raised. 

Insensitive commodities are those the demand for which is 
but little changed by changes in price. 

"We readily see that those commodities will be insensitive on 
which consumers have the least ability or the least inducement 
to economize. A few examples will make this clear. 

Pepper, mustard, and table condiments generally will be 
insensitive because their cost is insignificant. Tobacco is in- 
sensitive because a man who becomes addicted to it finds it so 
difficult to give it up that he would rather economize on some- 
thing else if the price of tobacco rises. Nearly the same re- 
mark applies to wines and spirituous liquors, so far as their use 
as beverages is concerned. 

Food considered as a whole is an insensitive commodity, be- 
cause it is most difficult for any one to go with much less than 
• his accustomed quantity. But if the price of only one particu- 
lar kind of food rises, it might prove to be sensitive, because 
some other kind would be substituted for it. For example, if 
the price of potatoes rises, bread can be eaten instead of pota- 



220 TEE LAWS OF SUPPLY AND DEMAND. [III. 16. 

toes, and vice versa. So one kind of bread or meal can be 
used instead of another. But if the prices of all sorts of food 
should rise in the same proportion, there would be no motive 
to substitute one for the other, and people would have to 
economize on something else. 

On the other hand, clothing, especially fine clothing, is proba- 
bly a sensitive commodity. Most people could make their old 
clothes last a good deal longer than they do ; there is there- 
fore a strong inducement to buy fewer fine clothes, or no fine 
clothes at all, when the price rises. The same is true of those 
luxuries which people indulge in only as their means increase. 

As we ascend in the scale of luxury we find that the demand 
for commodities depends more and more on the cost of things 
below them in that scale, and therefore proportionally less on 
their own cost. Hence we cannot strictly classify them as 
being, in themselves, sensitive or insensitive. 

Investments and other forms of capital are a case in point. 
Many people save up a part of their annual income to be in- 
vested in bonds, stocks, and other interest-bearing securities. 
If then the price of anything which they deem necessary rises, 
they may stop saving and spend their surplus income in paying 
the increased price for the necessary articles of current con- 
sumption. This will tend to make the necessaries and small 
luxuries of life less sensitive than the average, because by 
economizing in investments and costly luxuries consumers will 
have more money to spend on other things. 

16. Reaction of Demand on Price. In what precedes 
we have compared the effect of different scales of prices for a 
commodity when the general conditions which exist in the 
market remain unaltered. Our conclusion has been a law 
according to which a cause which changes the price of a com- 
modity, without at the same time changing anything else, will 
change the demand. This limitation is expressed by the con- 
dition " other things being equal." Although other conditions 
are always equal for the time, yet as a matter of fact they do 



III. 17.] THE RELATION OF PRICE AND DEMAND. 221 

not remain equal from one time to another. That is to say, 
although it is certain that to-day, or any other day, more flour 
can be sold at $5 per barrel than at $5.10, yet it is possible 
that more can be sold at $5.10 to-morrow than can be sold at 
$5 to-day. Some new use may be found for flour, or it may 
suddenly be wanted to make up a failure of the crops in Eu- 
rope. Then there will be an increase of demand, even if the 
price should remain unaltered or should be raised. Since in 
this case a greater quantity can be sold at the old price, dealers 
will be able to increase the price, while at the same time sell- 
ing a greater quantity than before. Self-interest will prompt 
them to do this. Hence we have a second general law : 

Other conditions being equal, an increased demand for any 
commodity increases its market jprice. 

Combining this law with the other, we see the nature of the 
mutual interaction between price and demand. Weak reason- 
ers sometimes find it hard to see that increase of price causes 
diminished demand, and that diminished demand diminishes 
price. In reality this mutual interaction is necessary to equili- 
brium. If increase of price acted on demand so as to increase 
it also, we should have an increasing price causing an increased 
demand; this increased demand would again increase the price, 
and so the two would go on increasing without stopping. Evi- 
dently this can never be the case. But since the actual rule is, 
increasing price diminishes demand, this diminished demand 
tends to diminish the price ; a state of equilibrium is reached 
between the opposing forces ; a rise of price is checked by the 
fallling off of demand, and falling price is stopped by stimulat- 
ing demand, which keeps it from falling without limit. 

17. Onr next inquiry is how the two preceding laws con- 
necting price and demand are to be modified so as to apply to 
the actual way in which business is done. The case to which 
the laws apply without modification is that when the demand 
which we consider comes from the people who actually con- 
sume the products, and when the price which we consider is 



222 TEE LAWS OF SUPPLY AND DEMAND. [III. 18. 

what those people have to pay. Of course this price is gener- 
ally the retail price. Now, will the same law apply in the 
wholesale markets, and in those cases in which large purchases 
of goods are made, not for purposes of consumption by the 
producer, but for re-manufacture into other things ? 

Granting that consumption and retail prices are connected 
by the laws already laid down, we remark that the retail and 
wholesale prices necessarily vary together, so that the con- 
sumption must indirectly depend upon the wholesale price. 
Now, although it is not always true that the retail price varies 
immediately with every change in the wholesale price, yet 
these two prices must in the long-run correspond to each other, 
at least in the case of the great staples of life. Suppose a 
grocer to purchase flour at $4 and to sell it at $4.25. It is cer- 
tain that if the wholesale price is increased 25 cents, he cannot 
continue to sell at the same price as before. If the wholesale 
price falls, he will have to lower his price in a corresponding 
decree, or other dealers will undersell him and he will lose his 
customers. Thus, as a general rule, the profit in selling at re- 
tail will be the lowest which will permit the retail dealers to 
meet all the expenses of their business and compensate them- 
selves for their labor and skill. The modifications to which 
this general rule is subject will be considered in future chap- 
ters. We therefore conclude that, as a general rule, the de- 
mand will increase as the wholesale price diminishes, and vice 
versa, because the wholesale and retail prices vary together. 

18. Equilibrium of Supply and Demand. In a normal 
state of things the price will be so adjusted as to preserve an 
equilibrium between the supply and demand. To return to 
our illustration, suppose that, the price of flour being $5 per 
barrel, the dealers- of New York find that the quantity which 
comes into their market is sold nearly as fast as it arrives ; there 
will then be no occasion for a change in either the supply, the 
demand, or the price. Suppose then that there is an unusually 
good crop, or that from any cause whatever an increased supply 



•in. 19. J THE RELATION OF PRICE AND DEMAND. 223 

is brought to market, the conditions of the market otherwise re- 
maining the same. The result will be that so long as the price 
remains at $5 the increased supply will accumulate on their 
hands. In order to get rid of it they will be obliged to lower the 
price. This will cause an increased demand both at home and 
abroad, according to the first law. The normal equilibrium 
will be reached when the price is so fixed that the increased 
demand thus caused exactly balances the increased supply. 

Suppose, secondly, that instead of an increased supply there 
is a diminution in the supply. Then the people who go to 
market offering $5 per barrel cannot all be supplied. To de- 
cide who shall be supplied, the dealers raise the price. This 
action will, by the first law, diminish the demand. The nor- 
mal price will be that which brings the demand down to the 
supply. 

To illustrate the second law, let us consider that the supply 
remains constant, but that the change occurs in the demand. 
Suppose that owing to a failure of the European crop there is 
an increased demand. The immediate result will be exactly 
the same as in the case of a diminished supply. The demand 
cannot be entirely satisfied and the price must be raised. The 
rise in price will have the double effect of increasing the sup- 
ply and diminishing the demand. When they are equalized 
equilibrium will be restored. 

19. Discounting the Market. The sale of goods at retail 
for consumption generally goes on at a very regular rate. But 
in the wholesale market the changes may be sudden to any ex- 
tent, the exchanges being determined not merely by the present 
price, but by the judgment of men as to what the price or the 
supply is going to be in the future. If, in the opinion of a 
wholesale dealer, the price of wheat is going to rise five per 
cent within the next three months, he will at once proceed to 
purchase a large stock. If it is going to fall, he will make no 
more purchases than are necessary for his present business, but 
will rather make contracts to sell wheat three months hence 



224 THE LAWS OF SUPPLY AND DEMAND. [III. 19. 

which he has not yet bought, but which lie intends to buy at 
the lower price. Since all the wholesale dealers proceed on 
the same system, it follows that the prospect of a future rise 
in price will cause a present rise. If reports show the proba- 
bility of a short crop, then, although a year may elapse before 
the scarcity will be felt, an immediate rise of price will result. 
This will be true even if the short crop is that of some foreign 
country, because then that country will demand more wheat 
from us. The act of purchasing according to an expected 
price is called discounting the market. The effect of this 
cause is to make prices more steady than they would be if no 
account were taken of the future supply and demand. The 
wholesale dealers in the great markets adjust their price, not to 
the supply and demand of to-day, but to the probable supply 
and demand of the future. They make the adjustment so that 
in the long-run the consumption shall as nearly as possible bal- 
ance the production. 

/Speculative Transactions. In the regular course of trade all 
commodities may be considered as passing from hand to hand 
only in one direction. If A sells wheat to B, it ought to be 
because A is in nearer communication with the producer than 
B is, while B is in nearer communication with the consumer. 
If A sold to B and B sold back to A again, there would 
have been two sales with no net result. So, also, if the wheat 
passed from A to C through the hands of B, when C could 
just as well have purchased from A, B's labor would be 
wasted. Hence when all transactions are conducted in the 
most economical manner there will be no more exchanges than 
are necessary to the proper care of the wheat while it is passing 
from the farm to the mill. 

But there is one occasional exception to the rule. A and B 
may have different opinions on the subject of the future price 
of. wheat, the one thinking that it is going to fall, the other 
that it is going to rise. Then B may purchase the wheat, not 
to send to some other market, but to keep in order to re-sell it 
in the future at a higher price. Perhaps he will sell it back 



III. 20.] THE RELATION OF PRICE AND DEMAND. 225 

to the very man from whom he bought it, in which case the 
latter will suffer for his want of judgment. This operation of 
selling merely to take advantage of a prospective rise in price 
is called speculation. Its economic effects are greatly exagger- 
ated in the popular mind. It amounts to little more than 
betting on the future price of the article speculated in. 

Prices in Different Markets. It is obvious that there can- 
not be two prices for the same commodity in the same market 
at the same time. Thus the price of wheat in Chicago is tele- 
graphed over the country from day to day with as much exact- 
ness as we know the height of the barometer. The same is true 
of the great cotton markets in Charleston and Liverpool, and 
of t he silver market in London. 

It is also evident that in two different markets the price/ 
cannot differ by more than the cost of transportation from one 
market to another. If it costs fifteen cents to transport a\ 
bushel of wheat from Chicago to New York, it is certain that 
the price in JSTew York cannot differ by more than fifteen 
_cents from that in Chica go. / For, if there were a greater dif- 
ference, dealers would purchase in the other market and trans- 
port it, thus saving money. If the demand in New York is 
such that it is necessary to transport wheat from Chicago to 
meet it, then the price in New York must be higher than that 
in Chicago by the cost of transportation. 

20. Is the rise of price consequent on increase of demand 
temporary or permanent f It does not follow that because 
increased demand raises the price the rise will be permanent. 
The first effect of such a change will be that the wholesale 
dealers will try to purchase more of the commodity and pay 
higher prices to the producers. If there is any prospect that 
the increased demand will be permanent, production will be 
stimulated ; manufacturers will enlarge their facilities and em- 
ploy more men, and new factories will be started. As the ul- 
timate result of this, one or the other of two opposite effects 
may follow. We have shown in Book II. that commodities 
15 



226 THE LAWS OF SUPPLY AND DEMAND. [III. 21. 

can frequently be made more cheaply on a large scale. If 
then the increased demand is such as to lead to more economi- 
cal production, the ultimate result will be to lower the price. 
For example, the price at which axes and hatchets are sold is 
very much below what they would cost if very few people 
wanted them. 

On the other hand, it may happen that an article cannot be 
produced on a large scale with advantage owing to the limited 
supply of something necessary to its production. A rise of 
price due to increased demand may then be permanent, as will 
be shown in the next chapter. 

21. The Law of Value applied to Money. When money 
and goods are exchanged for each other we may consider the 
act of exchange to consist in the buying of the money with 
the goods, and the latter will then be the price paid for the 
money. In this case increasing the supply of money has the same 
effect as increasing the supply of a commodity; that is, the 
value of the money relative to the goods it exchanges for falls. 
This is the same as saying that a larger amount of money will 
be required to purchase a given commodity ; that is ? there will 
be a rise of prices. The law under which this occurs will be 
fully explained hereafter. At present we need only state the 
result, which is : If the volume of currency be increased, all 
other things being equal, money will be cheaper relatively to 
goods, and thus the scale of prices will be increased in the 
same proportion. 



EXERCISES. 227 



ILLUSTRATIONS AND EXERCISES, 

1. Mill says there can be no such thing as a general rise in values. Ex- 
plain this generally, and especially in the case of a general rise of prices, 
and show under what limitations it is true. 

2. Can we make any exact comparison of the value of a barrel of flour 
among the Puritans two centuries ago with its value at the present time? 

3. Show the different results when the value of an article rises in conse- 
quence of its scarcity, and when in consequence of some new use being 
found for it. 

4. During the Civil War the prices of nearly all commodities were twice 
as high as before. During the ten years following the close of the war 
there was a gradual diminution of all prices, so that the owner of a farm in 
1875 might find it worth only half as many dollars as in 1864. Do you con- 
ceive that the rise of values in the one case and the diminution in the other 
indicated any actual change in the national wealth? What did these varia- 
tions indicate? 

5. If we regard value as purchasing power, explain how it is to be meas- 
ured. Does any error arise from this view of value? 

6. If we lived in a country where all the food and clothing we wanted 
could be had without labor and without price, — where all kinds of food 
ready to eat grew from the ground, and clothing of the latest fashion grew 
upon trees, — would values be greater or less than they are now? 

7. It is sometimes said that exchange increases wealth ; that is, that things 
are more valuable after they have exchanged ownership than they were 
before. Under what limitations is this true, and how does the friction of 
exchange enable us to define the increase? Compare the value of a pound 
of sugar in the barrel at a grocer's store with the same value after the sugar 
has been sold to the customer. 

8. Can you apply the theory of value so as to lay down any rule to govern 
the education and training of youth ? If there is one kind of knowledge and 
understanding which a man can readily acquire whenever he wants it, and 
will acquire by his daily experience, and another kind which he can acquire 
only when under the discipline of the school, show how the theory of value 
will apply to the question what the school should teach. 

9. Some writers have claimed that prices are regulated by competition. 
If we grant that this is true, does it give us a satisfactory scientific theory 
of the subject? 

10. In our markets the price of flour and corn-meal are generally in the 
ratio 3 : 2. Explain how this ratio arises. 



228 THE LAWS OF SUPPLY AND DEMAND. 

11. " The price of mutton on an average exceeds that of beef in the ratio 
of 9 to 8: we must conclude that people generally esteem mutton more than 
beef in this proportion, otherwise they would not buy the dearer meat." 
Can you make any improvement on this statement? Do the respective 
quantities of mutton and beef which are eaten come into the question? 

12. In London, on April 15, 1865, copies of the London Times containing 
the news of President Lincoln's assassination sold at the price of sixty 
cents or upward. Mr. Shadwell says he knows of no cause which deter- 
mined the price to be exactly sixty cents. What can correctly be said on 
the subject? Is there any reason to believe that the price of sixty cents was 
at any moment uniform all through the city, or that it continued through a 
period of several hours? What do you suppose was the actual state of the 
case? 

13. Arrange the following articles of common consumption according to 
what you suppose to be their respective degrees of sensitiveness, putting 
the most sensitive at the top of the list and the least sensitive at the bot- 
tom: corn-meal; coarse rye flour; pork; beef; sugar; molasses; coarse 
clothing for laborers; fine clothing; tobacco; imported wines; writing- 
paper; ink; pepper; magazines; paintings; government bonds. 

Each product may be considered sensitive or insensitive according to 
the criterion laid down in § 15. If the rise in price causes more than the 
corresponding economy of consumption, so that people in general spend less 
money for it when the price is high, the commodity is sensitive. In the 
opposite case it should be classed as insensitive. If the consumption 
varies inversely as the price, so that the money expended for a commodity 
may be considered to remain constant, the commodity should be classified 
as sensitive in an average degree. 

14. Show that the degree of sensitiveness of a whole class of commod- 
ities, one of which may be substituted for another, will be very different 
from that of each of the commodities considered separately. Consider, 
for example, the various kinds of meat — beef, mutton, veal, etc. If we 
suppose the price of one of these to rise while the price of all the others 
remains constant, we should find for each one taken separately a certain 
degree of sensitiveness. But suppose the price of all should rise in the 
same proportion ; show that they would then be less sensitive. If food of 
every kind should rise in the same proportion, to what extent would it 
prove sensitive? 

15. If statistics show that in the city of Cincinnati the sales of flour 
had increased 22 per cent from one year to the next, while the price was 
10 per cent higher, would you conclude that" the change of price was due 
to a change in the demand or vice versa ? What would you reply to an 
objector who should tell you that this fact was contrary to the law of price 
and demand laid down in § 14, and so disproved that law? 



EXERCISES. 229 

State the criterion for determining in such a case whether it is the price 
which changes the demand or the demand which changes the price. 

16. It is said that the Dutch possessors of certain islands in the East 
Indies, where the whole supply of certain spices was raised, were in the 
habit of ascertaining every year the total crop. If they found it to exceed 
the amount they could sell, every one was required to burn his share of the 
excess in order that the price might not be lowered by too much being 
thrown in the market. Were they the gainers by this operation? On what 
principle would the gains depend? 

17. If the price of food of every kind should rise 25 per cent, what effect 
would that rise have upon the consumption of other commodities, and what 
effect upon their price? 

18. Sugar is much more necessary to table enjoyment than pepper. Yet, 
should the price of both rise threefold, people would economize much more 
on the sugar than on the pepper. Explain this. Apply the explanation to 
the classification of commodities in the order of necessity on the following 
definition: Assume a man's income to diminish progressively. Then things 
are necessary in the order in which he dispenses with them. 

19. Show that insensitive commodities are those whose price will rise 
most in case of scarcity. 

20. If all commodities should become cheaper in the same proportion, 
of which class, the necessaries or the luxuries of life, would the consump- 
tion be the more augmented? 

21. What effect would a general failure of the crops all over the world 
have upon the price of fine clothing? 

22. If such a failure of the crops were foreseen by the wholesale deal- 
ers in grain six months before it occurred, but remained unknown to the 
general public, in what way would the public be led to economize in the 
consumption of their existing supply of grain? 

23. When our government issued a large volume of greenbacks in 1862, 
gold began to be at a premium in New. York. Many people attributed 
this state of things to the gold - dealers of Wall Street. Have you any 
opinion on the subject? What effect had the issue and the war together 
upon the prices of commodities in general? Could the changes in the 
prices of commodities affect the premium on gold, and if so, how? 

24. If railways were abolished, what would be the effect upon manu- 
factures in Iowa, and upon agriculture in New England? 



230 THE LAWS OF SUPPLY AND DEMAND. [III. 22. 



CHAPTER IV. 

MONOPOLIZED REQUISITES OF PRODUCTION. 

22. In tlie preceding chapter we were mainly concerned 
with the mutual relations of price and demand. The next 
subject in logical order is the effect of a change in the demand 
for a commodity, or its price, upon the supply. From the 
popular point of view, which was to a certain extent the view 
of the earlier economists, the law is very simple. When the 
price of a commodity rises, more people will engage in its pro- 
duction, until by their mutual competition the price is brought 
to the lowest paying point. If skill is required in the work, 
then the producer of that skill must be paid for the labor which 
he spent in acquiring it. If the compensation is more than suffi- 
cient to pay for the labor, it will stimulate men to acquire the 
skill. Thus the gains of a physician form the compensation 
not only for his current work, but for the time and money 
which he spent in learning his profession. It is thus conceived 
that the price of a commodity can be ultimately expressed in 
terms of human labor, provided we include not only the labor 
spent directly in production, but in collecting all the requisites 
of production, whether capital, skill, or knowledge. 

There was one obvious exception to this. The production 
of breadstuffs and other means of subsistence required land, 
and it was clear that the price of land did not admit of being 
measured by human labor, since it was not the product of labor. 
Thus rent became an important factor in the price. Rent was 
defined by Adam Smith as the income received by the owner 
for the original indestructible powers of the soil. 

It was next seen that production could not be increased 
indefinitely by the mere increase of human labor, but that in 
many cases every additional unit of quantity produced required 



III. 23.] MONOPOLIZED REQUISITES OF PRODUCTION. 231 

more labor than the preceding unit. For example, suppose that 
from a given farm 1000 bushels of wheat can be produced at a 
certain cost in labor, fertilizers, management, etc. It is possi- 
ble that by doubling the cost, that is, the labor and material 
devoted to the farm, 2000 bushels could be raised. If with 
every addition of this amount of labor 1000 additional bushels 
of wheat could be raised from the farm, it is evident that there 
would be no limitation upon the amount. But as a matter of 
fact we know very well that this is not the case, and that after 
a certain point every additional bushel will cost more and more 
labor, and that practically no amount of additional expense will 
increase the product beyond a certain maximum. 

We must now recognize the fact that at the present time all 
the requisites of production are not equally at the command of 
every one, but that in a great number of cases their possession 
is limited to such an extent that no sufficient approximation 
to the truth can be gained by assuming that production can 
be measured in labor alone. We need a word to express 
the possession of requisites for production which are not at the 
command of men in general, and the word which best expresses 
this is monopoly. The use of this word is indeed subject to 
the great objection that it is used in ordinary language as a 
term of reproach. Were this' idea necessarily associated with 
it, economists should find another. But it should be a part of 
the training of the scientific student to eliminate all ideas 
of praise and blame from the terms which he uses, and to re- 
member that science deals only with things and facts as they 
are. Hence when we use the word " monopoly " we attach no 
reproach to the idea conveyed, but simply use the word to 
designate a certain state of things. 

23. How the Monopoly Element comes into the Question. 
Suppose a great increase in the demand for a commodity C. 
We may suppose, to fix the ideas, that while a year or two ago 
a quantity of C represented by 1000 units could be sold annually 
at a price of $1 per unit, the same amount can now be sold at 



232 TEE LAWS OF SUPPLY AND DEMAND. [III. 24. 

$3 per unit, or that 3000 can be sold at $1 per unit. It is then 
clear that the result must lie somewhere between two extremes. 

The first extreme case is that in which all the elements nec- 
essary for the production of C are at the command of everybody, 
or at least of as many people as are necessary to supply the in- 
creased demand of 3000 units. The result of this will be that 
a slight increase in the price of C will stimulate those already 
engaged in producing it to enlarge their facilities, and will 
draw other people into the work. This increase of production 
will continue until the amount produced is trebled. As pro- 
duction has kept pace with demand, the selling price will be the 
same as before, or at least not materially higher. 

But suppose, as the other extreme case, that some element 
necessary to the production of C cannot be commanded by the 
world at large. Perhaps there is a man X who alone possesses 
the knowledge and skill to make C at a less cost than $3 per 
unit, or who has a patent on something which is a necessary 
component of O, or there is a company Y which owns a mine 
out of which the raw material for making C can alone be got. 
It is then clear that there will not necessarily be any increase of 
production, but that, instead of 3000 units of C being sold at 
$1 per unit, there may be only 1000 as before, with the sell- 
ing price raised from $1 to $3 in consequence of the increase 
of demand. 

The word which expresses this exclusive command by X or 
Y may now be defined as follows : 

A monopoly is the ownership or command, by one or a 
limited number of persons, of some requisite of production 
which is not solely a product of human labor. 

24. A little consideration will make known to us three 
classes of monopolies. 

Firstly, the exclusive command of every man over the facul- 
ulties with which the Creator has endowed him constitutes a 
monopoly. If a man is born with an unusual share of admin- 
istrative or business ability which enables him to organize and 



III. 24.] MONOPOLIZED REQUISITES OF PRODUCTION. 233 

direct the productive labor of thousands of other men in the 
most effective and economical way ; if he is born with any 
special talent, or with unusual skill in any branch of produc- 
tion, then lie has the monopoly of a valuable requisite of pro- 
duction which his fellow-men cannot take from him. This 
monopoly is not only a rightful one, but the principle on 
which it rests is at the basis of all our ideas of human rights. 

The second great class of monopolies consists in the private 
ownership of natural requisites of production. As already 
shown, the laws of all civilized nations recognize, establish, and 
protect this ownership. Such natural requisites are land, and 
the coal, iron, and other minerals which are beneath it. Although 
the value of land depends largely on human labor, yet the land 
itself, the acres on the surface of the earth, are entirely the gift 
of nature. The iron, copper, silver, tin, and other ores be- 
neath the surface of the earth are also entirely the gift of 
nature. Although labor is required to give them value, yet 
every one is not at liberty to apply this labor ; the right to do 
this being absolutely confined to the owners. The question of 
the rightfulness and expediency of this class of monopolies 
may be regarded in some of its points as an open one, but its 
discussion does not belong to the purery scientific treatment of 
the subject. 

The third class of monopolies consists of those which are 
granted by governments, such as the exclusive right to build 
a railway or dig a canal over particular regions, to make a pat- 
ented article, or to publish a copyrighted book. Patents and 
copyrights are in a certain degree a mere extension of the first 
class of monopolies, since their object is to guarantee to inven- 
tors and authors the benefit of any superior skill with which 
nature may have endowed them. 

It may seem that patents and copyrights do not strictly come 
within our definitions of monopolies, since what is monopolized 
cannot be called a requisite of production limited in supply. 
It is perfectly true that they are not material requisites of pro- 
duction. But we have shown that knowledge, which is imma- 



234 TEE LAWS OF SUPPLY AND DEMAND. [III. 25. 

terial, is a very important requisite, and what is granted to the 
patentee or author is the benefit of a certain knowledge which 
he has himself acquired. The man who can write a very in- 
teresting and popular novel has been endowed by nature with 
a peculiar skill which he can use to increase the pleasure of his 
fellow-men. It is perfectly right that he should gain whatever 
compensation he can by the use of this special skill. But when 
he writes his story everybody can copy it and spread it, unless 
forbidden to do so. Thus in order to secure the author's right 
to the product of his skill and labor it is necessary that gov- 
ernment shall prohibit the multiplication by printing of copy- 
right stories, except with the author's consent. In form the. 
monopoly is that of printing certain combinations of words in 
a book, and we may consider the monopoly to consist in the 
exclusive right to use these printed words. From this point 
of view the object in which the wealth inheres would not be the 
work of nature. But the author's faculties are originally the 
work of nature, and it is this which we should regard as really 
protected by the copyright laws. These same remarks apply 
to patented machines with so few modifications that the reader 
can make them for himself. 

25. Limitations upon the Definition of the Word Monop- 
oly. The essential feature of the monopoly element in produc- 
tion, which gives it its economic importance, consists in this, that 
the possessors of monopolies may have to a greater or less extent 
an advantage over their less favored fellows in the price which 
they can command for the use of the special agencies monopo- 
lized. This advantage must be not merely a temporary one, 
but such as to entirely prevent competition on equal terms be- 
tween the less and the more favored classes in the use of the 
monopolized agency. In order that the definition may include 
nothing but what is essential to this advantage, certain limita- 
tions have to be placed upon it. 

First Limitation. A monopoly is of no value or account 
unless the number of persons who possess it is so small com- 



III. 25.J MONOPOLIZED REQUISITES OF PRODUCTION. 235 

pared with the quantity of the monopolized article which the 
public demand that these persons can command a higher price 
for the article than if there were no monopoly. For example, 
in the widest sense, we may say that John Smith has the com- 
plete and exclusive monopoly of his own hands. But if his 
hands are no better than those of other people, this monopoly 
gives him no advantage over them, because they can do what- 
ever lie can. Again, the shoemaker has the monopoly of his 
own skill; and it may be that not one man out of fifty in the 
community has the natural aptitude which would enable him 
to become a good shoemaker. But if this fraction of the pop- 
ulation has the aptitude, and can make all the shoes the com- 
munity demands, the monopoly is of no value. We must there- 
fore distinguish between effective monopolies, which give their 
possessors an advantage in production, and ineffective monop- 
olies, which give no such advantage, either because there is not 
sufficient demand for the monopolized requisite, or because 
too many people share the monopoly. Hereafter whenever we 
use the word monopoly we shall be understood to mean an 
effective monopoly. 

Second limitation. It must be understood that the applica- 
tion of the word monopoly is limited to such requisites of 
production as are not the sole products of the labor of the 
person owning them. Now, a number of elements enter into 
every production. "When, therefore, we inquire how far a 
requisite of production is monopolized, we must analyze it into 
its original elements until we find where the natural agency 
comes in. For example, the skill of the shoemaker may be 
entirely a product of time and labor spent in acquiring it. But 
in order to effectively expend that time and labor he must have 
possessed in the beginning the industry and perseverance to 
enable him to learn his trade. This industry and perseverance 
may be in part acquired qualities, and therefore not monopo- 
lies ; but in so far as the man did not acquire them they are 
monopolies. In order to acquire them he must have had some 
good qualities born in him, and his parents must have taken 



236 THE LAWS OF SUPPLY AND DEMAND. [III. 25. 

some pains in promoting these qualities. Now, since the man 
did not make himself nor guide his parents in his early educa- 
tion, it is to these native and early acquired habits that we are 
to look for the monopolized elements in his nature. 

So also with regard to any finished product. "We cannot 
generally say of the product as a whole that it is or is not mo- 
nopolized. What we must do is to trace its production back 
to its beginning, and see what monopolized elements in the 
shape of patent-rights, land, ores, or other natural products 
were necessary elements in its existence. 

Third Limitation. Monopolies are not in general abso- 
lute, but the advantages which they give vary in degree. As 
a general rule a monopolized requisite is not one which the 
owners of the monopoly alone can supply on any terms what- 
ever, but it is one which the} 7 can supply with less labor to 
themselves than other people can. To return to our former 
example : even if one or a few men, owing to their superior 
skill, should monopolize all the shoemaking of a community, 
it may nevertheless be the case that other people could, on a 
pinch, make shoes. Again, the ownership of land is very valua- 
ble near a city, and continually diminishes as we go away from 
population. If the owners near the city charge too high for 
their products, people can fall back on the more distant land. 
Some deposits of iron ore may be so rich in metal and so near 
the surface that iron can be made from them at six dollars per 
ton ; from other deposits it might cost twelve dollars a ton, and 
from yet others twenty, fifty, or a hundred. The values of these 
monopolies therefore differ in degree, and no one of them be- 
comes effective until it will pay to utilize the ore. 

Since, in these cases, a monopoly only means facilities supe- 
rior to those enjoyed by other men, there is implied in it a term 
of comparison comprising men in general. Then when we 
say that this man X possesses talents, skill, or a natural agent 
superior to those enjoyed by men in general, the question may 
arise what we are to understand by this last term. There are 
so many gradations among men that we can set up no exact 



III. 26.] MONOPOLIZED REQUISITES OF PRODUCTION. 237 

standard as that of men in general. The question cannot be 
answered in a way which shall be mathematically exact. "We 
can only say that the proper term of comparison is the class of 
men having the same general talents, education, possessions, or 
powers of production in the community at large. Since this 
implies a series of gradually increasing monopolies, we may 
call them relative or graduated monopolies. 

An absolute monopoly will then mean one possessed only 
by one or a limited number of persons. 

26. Temporary Monopolies. If an individual or a company 
has a great capital invested in a manufacturing establishment, 
although there may be no actual monopoly, yet for the time 
being the situation will be the same in its relation to varying 
demand as if the skill and capital invested in the establish- 
ment were monopolized. An increasing demand, especially if it 
is believed to be temporary, cannot be at once met by other 
men founding similar factories, because this requires time, 
while the product is wanted now. But if demand falls off, 
the establishment cannot advantageously devote its capital and 
its organization to any other industry than that in which it is 
engaged. Cotton-making machinery can make nothing but 
cotton, and the operatives of the factory are not readily availa- 
ble for other employments. The result is that the owners of 
the factory may be obliged to go for a considerable period 
without gaining either profits on their investments or compen- 
sations for their peculiar skill. 

In this connection we must always remember that the econo- 
mic effect of a monopoly does not arise merely from its prevent- 
ing competition on equal terms, but that it also implies that the 
owner of the monopolized product cannot change his occupation 
without a relative disadvantage. For example, a lawyer who 
has rare natural gifts for his profession cannot advantageously 
change that profession merely because he finds the demand for 
his services falling off. The chances are that in any other pro- 
fession he can do no better than the common run of mankind. 



238 THE LAWS OF SUPPLY AND DEMAND. [III. 28. 

Thus the conclusion that the supply of a monopolized element 
cannot be readily increased to meet an increasing demand im- 
plies that it cannot readily be diminished to meet a diminish- 
ing demand. This is as true of a temporary monopoly as of 
any other one. 

27. Recapitulation. The preceding definitions may be 
summed up as follows : 

I. When one or a limited number of persons command the 
supply of any natural requisite of production their power is 
called a monopoly. 

II. Monopolies inhere, not in manufactured products, but in 
the original elements or requisites which are necessary to the 
existence of the product. 

III. A monopoly is ineffective if the number of holders is 
so great and the demand for the requisite so small that the 
holders can command no higher price for the requisite monopo- 
lized than will pay them for the labor and capital which they 
expend in supplying it. It is effective when the demand be- 
comes so great or the supply so small that the monopolized 
requisite commands a higher price than this. 

IY. A monopoly is complete or absolute if no others than 
one or a limited number of possessors can supply the requisite. 
It is relative or graduated when it comprises only superior 
facilities for supplying the requisite, so that the latter can be 
obtained from an unlimited number of sources by increasing 
the labor and capital devoted to obtaining it. 

V. A temporary monopoly may inhere in a manufactured 
product through a sudden increase of demand, or through all 
the manufacturers combining to limit production and keep up 
price. 

28. Effect of Monopolies upon the Relation between Price 
and Supply. We have seen that when the demand for a com- 
modity increases in such wise that more of it is wanted and, in 
consequence, people are willing to give a higher price for it, 



III. 29.] MONOPOLIZED REQUISITES OF PRODUCTION. 239 

one of two things will occur. Its producers must either make 
a greater quantity of the commodity in order to supply the 
increased demand, or they can and will charge a higher price 
without increasing the quantity. Thus the supply and demand 
can be equalized in either of two ways by a proper adjustment 
of the price. Both adjustments will commonly come into play; 
that is, a larger quantity will be produced, but not a quantity 
so much larger that it will all lie demanded at the old price. 
The production will be increased and the price raised at the 
same time. 

Let us return to the illustration of § 22. "We there supposed 
that 1000 units of a product C were sold annually in a certain 
condition of demand at the price of $1 per unit. When the 
demand is increased threefold the extreme results would be : 
1000 units produced as before, but sold at $3 per unit. 
3000 units produced and sold at the old price of $1. 

If, as a result of the increased demand, 3000 units were 
produced, corresponding to the increase, it would show that 
there was no effective monopoly. If only 1000 units were pro- 
duced, it would show that the monopoly was absolute. The 
average result might be that 2000 units would be produced, 
and would be sold at perhaps $1.50 per unit, or at least at some 
price exceeding $1. 

The state of equilibrium is reached when the price is so ad- 
justed that the quantity produced and brought to market is all 
that can be sold at that price, and all that the producers are 
willing to make at that price. 

29. The important distinguishing effect of a monopoly is 
that it prevents the supply of the commodity in which it in- 
heres from varying in response to variations in the demand. 
The question what kind of monopolies enter into a manufac- 
tured product, and to what extent they enter, can be best 
answered by investigating the effect of an increased demand 
for that product. 

If the conditions of production are such that any increase of 



240 THE LAW OF SUPPLY AND DEMAND. [III. 29. 

demand will be met by a corresponding increase of production 
without raising the price, then there is no monopoly. If, owing 
to the necessity of requiring skill or capital, a considerable 
period, say a year or more, is required to increase the produc- 
tion, then there may be a temporary monopoly. If, however, 
the price comes down to its former limit when a reasonable 
time has been given for increasing production, the monopoly 
is only temporary. If it will never come down, then the mo- 
nopoly is permanent and real. 

If the same party or parties must supply the market, no 
matter how much the demand may be increased, the monopoly 
is absolute. If the increased demand and higher prices result 
in a limited competition, the monopoly is relative. 

Moreover, in every case, to find in what particular requisite 
the monopoly inheres, we must seek out those requisites the 
supply of which cannot be indefinitely increased without in- 
creasing the cost. These will be the monopolized requisites. 

EXERCISES. 

1. Consider the various requisites for the production of a pair of shoes, 
and describe to what extent they are each monopolized, whether the monop- 
oly is effective, and, if so, what effect it has on the variations of price arising 
from variations in demand. 

2. Show that a requisite of production which requires longyears of study 
for its perfection will have to a certain extent tlie character of a temporary 
monopoly, although it may he within the reach of every one who devotes 
the necessary time to the study. 

3. Would it be correct to say that society is any worse off on account of 
natural monopolies of any kind ? For example, is it bad for society that 
there are a few physicians or surgeons of such extraordinary skill that they 
can command fees to the amount of a hundred dollars in a day ? 

4. Enumerate the principal monopolies of the first class described in 
§ 24, and show under what circumstances and to what extent they are 
effective. 

5. Under what circumstances will the owner of a waterfall be in posses- 
sion of an effective monopoly ? 

6. Show to what extent and in what way the ownership of iron ore in 
various parts of the country constitutes graduated monopolies ; that is, 
under what circumstances these monopolies are of the highest value to their 
owners, and under what circumstances they are of no value at all. 



III. 30.] THE BENT OF LAND. 241 



CHAPTER Y. 

THE KENT OP LAND. 

30. The ownership of land comes within the definition of a 
monopoly, as given in the preceding chapter. For land, that 
is, the acres on the earth's surface, is a product of nature and 
not of human skill. It is also a product limited in supply; or, 
at least, that portion from which any given collection of peo- 
ple can conveniently draw their subsistence is limited. This 
will be made clear by reflecting that no person can go out and 
fertilize and cultivate land at pleasure, because he will find 
that all the land within reach is already occupied by somebody 
else, and is owned by that other person as private property. 
But it does not follow from this that the monopoly is either 
an unlimited or an effective one, as we have defined these 
terms. We must therefore look more closely into the matter 
with a view of seeing how far the usefulness of the soil is to 
be regarded as the product of human labor, and how far as 
the gift of nature. There are economists who have claimed 
that land has no other value than that which has been derived 
from labor expended upon it by its owners, and is therefore 
not a monopoly at all. The general opinion of economists 
is, however, on the other side. The theory generally in vogue, 
and which we are about to develop, is commonly associated 
with the name of Ricardo, who first brought it to public 
attention in a clear and forcible way. In explaining it we 
shall closely follow F. A. "Walker, who has developed it with 
great clearness and fulness.* 

We begin by stating a fact which favors the view of the 
dissentients. We all know that land depends very largely for 

* In his little book, Land and its Rent (Boston, 1883). 
16 



242 TEE LAWS OF SUPPLY AND DEMAND. [III. 81. 

its fertility upon human labor. Before a crop can be raised 
the trees must be cleared away, the stumps pulled out and 
burned, and the ground cleared of the roots. Even in the 
case of the great prairies, where there are no trees to clear 
away, it is generally necessary to dig drains and to clear off 
the grass before the land can be cultivated. Then labor is to 
be applied to plough the land and sow the seed. Now suppose 
that one man working in this way upon a little farm of twenty 
acres could raise two hundred bushels of wheat. It will be 
found in many, perhaps most countries, that if two men work 
and put in twice as much material in the shape of fertilizers, 
plough twice as well, and so on, fully twice the crop can be 
raised off the farm. Possibly they might raise four hundred 
and fifty bushels by their combined efforts, and thus have 
twenty-five bushels each more than if they had worked alone 
on two separate farms of the same size. Perhaps if three men 
put their labor and fertilizers into the same farm, they would 
raise three times as much as one man. Now if this scale went 
on indefinitely — that is, if by increased labor and expense in 
fertilizing land, a proportional increase of crop could always 
be obtained — there could be no effective monopoly in land. 
Every man who wanted wheat could get as much by joining 
hands with his neighbor and helping him to cultivate his farm 
as he could by getting a farm of his own. 

But such is not the case. A point is soon reached in which 
an addition to the amount of labor and material expended on 
the farm will not give a corresponding addition to the crop. 
This point is called the point of diminishing returns. We 
may consider it as reached in every community and on every 
farm after a short period of cultivation. That is, the more 
wheat we want from a given farm, the greater the labor and 
capital required per bushel. 

31. Let us now suppose that, within convenient reach of a 
city or any other market, there are four tracts of land having 
four different degrees of fertility. The first tract, with a given 



III. 81.] THE RENT OF LAND. 243 

amount of labor and capital, will yield twenty-four bushels of 
wheat to the acre, the second twenty-two bushels, the third 
twenty bushels, the fourth eighteen bushels. Let us begin 
with the case in which the city is so small, or the market one 
where there is so little demand for wheat, that it will only pay 
to cultivate part of the twenty-four-bushel tract. Then it is 
evident that the other tracts can command no rent. 

Suppose a new man to come into the country seeking for 
land to cultivate. Since, by hypothesis, a portion of the 
twenty-four-bushel tract is still uncultivated, it will pay the 
owners of that tract better to let the new-comer have a farm 
upon it at a rental of one bushel per acre per annum than 
to leave it wholly uncultivated. He can pay this rent and still 
have twenty-three bushels per annum as his portion of the 
crop. This course will pay him better than it would to culti- 
vate the next poorer tract free of rent, because then he would 
only get twenty-two bushels, and he will of course choose it. 
If the point of diminishing returns has not been reached, it 
might even pay all concerned still better to employ the new 
man, with his capital, as an assistant in improving the cultiva- 
tion of the already-cultivated farms than to rent him a new 
one. Hence all the twenty-four-bushel farms will not be 
under cultivation until the point of diminishing returns has 
been reached. 

Suppose that all the farms of the twenty-four-bushel class 
are at length under cultivation, and that, owing to increased 
population or increasing demand, there is now more wheat 
wanted than can be raised from these farms under the existing 
system of farming. Supposing that no wheat is imported, this 
demand must be supplied by commencing the cultivation of 
the next lower grades of land, namely, those in the twenty-two- 
bushel tract. Now, by hypothesis, the same amount of labor 
and capital necessary to produce twenty-two bushels from this 
second tract will produce twenty-four bushels from an acre of 
the first tract. It will therefore pay a tenant as well to rent a 
farm from the first tract at two bushels per acre per annum as 



244 TEE LAWS OF SUPPLY AND DEMAND. [III. 32. 

to have land in the second tract for nothing. Hence, at this 
point, the land of the first tract will yield a rental of at least 
two bushels per acre. 

Suppose that by the still increasing demand the lands of 
the twenty-bushel and eighteen-bushel tract come into cultiva- 
tion. Then, reasoning in the same way, the twenty-bushel 
tract will yield a rental of two bushels, the twenty-two-bushel 
tract a rental of four bushels, and the twenty-four-bushel a 
rental of six bushels. For, the cultivator who rents land from 
the first tract at six bushels, or from the second at four, will 
be on the same level with the one who gets land on the third 
tract at two, or on the fourth for nothing. The general law 
is now evident : As population increases, lands of lower and 
low T er degrees of fertility come into cultivation, and the better 
lands command rent. If there is every grade of land within 
convenient reach, then the rental will be equaltto the excess of 
fertility of the best soil over that of the poorest soil which it 
will pay to cultivate. 

32. In the preceding exposition we have, for simplicity, com- 
pared lands as if the rental depended solely upon their fertility. 
But other causes come into play which can be brought into 
the same class by an extension of the word " fertility." We 
have supposed that with a certain amount of labor and capital 
land would yield eighteen, twenty, twenty-two, and twenty-four 
bushels to the acre. The general question is not, however, that 
of the number of bushels to the acre, but that of the number 
of bushels to a given amount of labor. When we use acres 
to illustrate the case we tacitly suppose that the labor of culti- 
vation is proportional to the acres. If from any cause what- 
ever it should cost twice as much labor to cultivate an acre of 
one farm as of another, the fertility of the first per acre would 
have to be twice as great in order to command the same fraction 
of the produce as rent. "We must therefore interpret the word 
fertility as meaning the yield for a given amount of labor, and 
not the yield per acre. 



III. 33.] THE BENT OF LAND. 245 

In the next place, we have supposed that the crops from 
the different farms compared were all equally accessible to the 
market. If this is not so, then the land farthest from the mar- 
ket will be at a relative disadvantage. But this again will be 
brought into the rule by including in the cost of cultivation 
that of taking the crop to market. The rule will then be that 
those lands from which crops can be gathered and brought to 
market with the least total expenditure of labor will command 
a higher rent. 

33. Relation of Rent to Price of Breadstuff s. In the 
case we have been supposing the tenants of the best farms will 
be paying to the land-owners a rent of six bushels of wheat 
per acre per annum. In order that they may be able to com- 
pensate themselves, they must get such a price for the remain- 
ing twenty bushels of their wheat as to return to them all they 
have expended in labor and material. That is, the price of wheat 
must be high enough to pay for all the labor and capital ex- 
pended in cultivation, and to make good the rent. This fact 
has given rise to the impression that the price of wheat is in- 
creased by the rent of land. 

A close examination will, however, show that this view re- 
verses the relation of cause and effect. It is the high price of 
wheat which causes rent, and not rent which causes the high 
price. That is, rent is an effect, not a cause, of the high price. 
The simplest way to show this is to refer to the two first laws 
of supply and demand (Chapter III.). These laws being true 
for each separate market, must be true at any one moment for 
the world at large. According to the first law, when the price 
of wheat is fixed at any given figure there will be a certain 
definite quantity which can be sold at that price. If only 
a certain number of bushels are brought to each market, 
then it will command in that market a price which will be 
higher the fewer the number of bushels brought. The buyer 
need not ask or care why the supply is plentiful or scarce. All 
that concerns him is to get his wheat at the lowest possible 



246 TEE LAWS OF SUPPLY AND DEMAND. [III. 33. 

price. And if other people are ready to buy all that comes at 
a certain price, he also has got to pay that price or go without 
the wheat. Hence the price depends upon the quantity of 
wheat brought to market. 

Now, it is quite true that if all the land-owners from whom 
it was possible to obtain a supply of wheat could by combin- 
ing among themselves prevent more than a certain number 
of bushels per annum from being produced, or, what amounts 
to the same thing, if they would not allow any one to have their 
farms except at a higher rental than the natural one just laid 
down, then they would raise the price. But this would only 
be because some of the tenants would refuse to cultivate the 
farms on such terms, so that less wheat would be raised. 
Such a combination is practically out of the question. Even 
if it were practised, it would not be a case of high rents 
causing high prices, but only a case of artificial scarcity caused 
by a combination on the part of the landlords to raise the 
price of wheat and thus to enable them to charge more rent. 

To sum up : Wheat is high because only a certain limited 
quantity is brought to market. 

~No more is brought to market because more cannot be 
raised without having recourse to less fertile lands, which it 
will not pay to cultivate until the price is yet higher. 

The cost to the farmer of raising any particular portion of 
wheat brought to market has nothing to do with the price at 
which it can be sold. 

To dispose yet more clearly of this view, let us trace the 
chain of causes in the opposite direction. Suppose one or all 
the owners of the best class of farms actuated by the philan- 
thropic desire to make the cost of bread to the public as low as 
possible. They therefore offer the lands to their tenants free 
of rent. "Will the price of wheat fall in consequence ? Not 
at all. This remission of rent would not increase the quantity 
of wheat which the farms would yield. The tenants would 
take the same amount to market as before. The same amount 
being brought to' market, it would command the same price. 



RENT. 247 

The only effect would therefore be that the tenants would 
themselves pocket the rent which they had formerly paid to 
the landlords. 

EXERCISES. 

1. Is it necessary to rent that there should he a regular gradation of fer- 
tility down to no-rent lauds? For example, if in the case supposed in § 31 
the first two tracts should be of equal fertility, and all the rest of the region 
utterly barren, would the fertile tracts command rent? 

2. If one should claim that no land commanded any other rent than 
interest on the capital invested in it, how would you test the truth of his 
claim? 

3. Show how the theory of rent applies in a country where the farmer 
owns the land instead of hiring it. What element then takes the place of 
annual rent? 

4. Why is land more highly cultivated in England than in America? 

o. Why is the rent of land so low in a state so densely populated as 
Massachusetts? 

6. When wheat is brought to market for sale, does the question what it 
cost the farmer to raise it have anything to do with the price he can com- 
mand for it? If yes, how do the buyers know what it cost in any particu- 
lar case, and how can the cost affect the bargaining? If no, show in what 
way cost of production does affect price. 

7. If land-owners were forbidden by law to charge rent, what would be 
the effect upon the supply and the price of breadstuff s? 

8. Would it be correct to say that it is of the very nature of a monopo- 
lized requisite that its supply cannot be increased indefinitely, even if the 
owner wanted to do it ? 

9. On what terms would the owner of an absolute monopoly find it 
profitable to increase the supply of his monopolized requisite ? Take as an 
example the case of the spices in the East Indies already mentioned. 

10. What has been the effect of steam-transportation upon the price of 
agricultural land in the neighborhood of great cities ? If we had no railways 
from the city of New York, what would be the result upon the price of 
land in the neighborhood of New York and on the Hudson River? Show 
according to what law the rent of land would vary in such a case, supposing 
the whole region to be of equal fertility. 



248 TEE LAWS OF SUPPLY AND DEMAND. [III. 34 



CHAPTER YI. 

ON COMPETITION AS DETERMINING COST. 

34. It is a current opinion that prices are necessarily kept 
down to nearly their lowest limit wherever free competition is 
permitted. The reason is briefly this : If the dealers in a 
commodity do not sell it at the lowest paying price, others 
will step in and offer the same commodity at a lower price, and 
thus draw away all the custom from those whose charges are 
too high. 

This proposition is sufficiently near the truth in the whole- 
sale trade of the country, and with respect to those necessaries 
of life which are produced and sold independently by great 
numbers of persons. In this case business success depends 
entirely upon the producer and jobber being able to sell at the 
lowest possible price. It is less true in the retail markets, and 
may fail entirely in special cases. We shall now analyze the 
principal cases in which it fails. Take first the general prin- 
ciple as we may conceive it exemplified by an example. A 
city dealer sells cloth at one dollar per yard which has cost 
him eighty cents per yard. We may suppose this cost to in- 
clude all the expenses of business and loss upon waste material, 
thus making the net profit twenty cents a yard. It occurs to 
the dealer to inquire whether by lowering his price to ninety- 
five cents a yard he will get custom enough to make good 
the diminution in the rate of profit. To effect this result his 
sales must increase by at least one third, otherwise the dimi- 
nution of profit on each yard from twenty to fifteen cents 
would not be compensated. Now if, when he thus lowers his 
price, he could make everybody know that fact, and could sat- 
isfy the public that it was a real diminution in price and not 
merely the substitution of a poorer article, he would succeed, 



III. 34.] ON COMPETITION AS DETERMINING COST. 249 

But in the majority of cases the cloth will be purchased only 
occasionally, and in such small quantities that it will not be 
worth while for the man's customers to make a special inves- 
tigation in order to learn about the diminution of price. Con- 
sequently it may well happen that his sales would not be in- 
creased by one third, and he would then lose by his attempt 
to sell at a lower price. 

The less important the commodity, that is, the smaller the 
amount of money any one expends for it annually, the less 
likely it is to be sold at the lowest possible price. It is not 
worth any one's while to change his grocer because some other 
grocer sells pepper or mustard ten per cent cheaper. Even 
in the case of such staples as tea and coffee, it is so difficult to 
ascertain the quality before trial that the customer finds it a 
very difficult problem to determine who it is that really sells 
at the lowest price, taking quality into account. 

In such cases, however, there is a tendency analogous to 
competition which does tend to lower prices by giving an ad- 
vantage in the long-run to him who sells the cheapest. Sup- 
pose two persons appear in business, one of whom goes on 
the principle of exacting the highest price from his customers 
that he can profitably command, while another sells as low as 
he can, perhaps from mere conscientious motives. The first 
may make the largest profits in one year and for several years, 
but the fact that the second is a more economical dealer to 
purchase from will gradually become known to a larger and 
larger section of the community, so that he may ultimately 
have the most profitable business. Moreover, the very state of 
things which makes this access of custom so slow will make it 
permanent. A large body of customers having become per- 
manently satisfied with his dealings will not take the trouble 
to investigate whether some one else may not serve them a 
trifle cheaper, and thus he may be on the sure road to fortune. 
The general fact thus illustrated is this : If the question which 
suggests itself to the retailer's mind is, What are the most profit- 
able prices for me to charge these individual customers for this 



250 THE LAW8 OF SUPPLY A1SD DEMAND. [III. 35. 

article ? the answer may be very different from what it will be 
if he asks himself what price will in the long-run best serve 
to give him a permanent and enduring trade. 

35. Cases of Prices not determined by Competition. We 
have in the three preceding chapters laid down and illustrated 
the law that if the price is above the normal one at which 
supply and demand are balanced, the supply will exceed the 
demand, and there will be in the case of a commodity a con- 
tinually increasing accumulation which cannot be disposed of. 
There are, however, large classes of services in which the equi- 
librium .will be brought about in a somewhat different way. 
A price may be fixed either by law or custom for certain 
personal services. If this price is below the normal one, a suf- 
ficient number of people cannot be found to render the services, 
and there will be an unsupplied demand. If the fixed price is 
above the normal one, and if there is no monopoly, the supply 
will exceed the demand. 

Carriage-fares afford one case in point. It is so difficult to 
satisfactorily fix the price of a drive in a carriage by bargaining 
between the passenger and the driver, that in nearly all civil- 
ized cities a tariff of prices is fixed by the municipal authori- 
ties. In cities where this tariff is low, passengers will frequently 
find it difficult to secure carriages, because it will not pay the 
owners to keep more carriages than there is constant employ- 
ment for. When it is above the normal price the number of 
carriages to be had will exceed those which are necessary to 
carry all the passengers demanding them at the fixed rate. 
The result will be that a certain proportion of the carriages 
will stand idle a large part of the time. In this case the com- 
petition is not a competition as regards price, but a competition 
to secure a passenger at a fixed price. It is a fact continually 
lost sight of that this competition is just as effective in bring- 
ing the compensation of each individual driver to the lowest 
limit as would be a competition in the matter of prices. ]STo 
permanent gain can accrue to individual drivers by having the 



III. 36.] ON COMPETITION AS DETERMINING COST. 251 

tariff raised, unless they can at the same time keep out compe- 
tition. If free competition is allowed, additional carriages will 
be bought, more men will go into the business, the profits 
will be divided among a larger number, and this process will 
continue until the individual profits of each driver are reduced 
to the lowest point at which he is willing to remain in the 
business. 

Another case is afforded by the sale of newspapers. As a 
general rule the price at which any newspaper is sold remains 
unchanged through all the vicissitudes of supply and demand 
for long periods of time. The equilibrium is then kept up 
by publishers accommodating their supply to the demand, in- 
creasing or diminishing it according as there is more or less 
matter of public interest in the paper sold. 

If the prices of all journals were fixed by law, custom, or 
mutual agreement, the competition would be entirely in respect 
to quality. That paper would get the largest circulation which 
most pleased its subscribers. The result would be that more 
and more labor and expense would be devoted to its produc- 
tion, and by this competition the profits would again be brought 
to their lowest limit. 

36. Cases where Competition is Difficult. In the preced- 
ing cases we have supposed the service to be such that it can 
be easily rendered, and that great numbers of people can en- 
gage independently in rendering it. But in recent times a 
large and important class of services have sprung up, in which 
the amount of wealth and organizing ability required to render 
them is so great that a temporary monopoly may be established, 
though none is legalized. Then this monopoly may be ren- 
dered permanent, or at least may be continued through many 
years, by skilful management. Such a case is seen in the tele- 
graph system of the United States. "When a single company 
possesses the only line between two cities, or over a certain 
region of country, it can fix its own price for messages. It 
may find it profitable to keep this price far above the nor- 



252 TEE LAWS OF SUPPLY AND DEMAND. [in. 37. 

mal rate, rather than to enlarge its facilities, so that a great 
number of messages can be sent at a low rate. If a competing 
company is proposed, its promoters may foresee that, at the low 
prices to which competition would lead, it would be unable to 
make a profit. It may therefore stay out of the competition 
long after the business would be sufficient to give it a paying 
profit, were they secure against a fall in prices. During all this 
period of doubt and uncertainty the first company has the field 
to itself. Suppose at last a competing company to build a new 
line, and to take messages at a low rate ; if this low rate is not 
as profitable as a higher one would be, the two companies may 
combine in some way, or the more wealthy may buy out the 
poorer one, so that the monopoly shall still be kept up. The 
whole history of telegraph companies in the United States has 
been of this character. It is supposed that great numbers of small 
companies have been established for the sole purpose of being 
bought out by more powerful rivals, in order that the latter 
might continue their temporary monopoly. 

It will be seen that the only cases in which individual pro- 
fits can be kept permanently above their normal minimum is 
that in which some monopoly is owned by the producer. This 
monopoly may be one of individual skill, knowledge of busi- 
ness, or the possession of some natural agent. 

37. Competition among Business Managers. We have 
seen, in treating of labor, what an almost infinite variety there 
is in the employments which men engage in for pay. The nat- 
ural endowments of men by which they are qualified for one 
or another employment also differ in an important degree. 
Considered in their effects, these differences in capacities are 
enormously greater than they appear when considered in them- 
selves. To illustrate what we mean, consider the difference 
between the captain of a great steamship and one of the sailors. 
They differ very slightly in bodily structure, and the sailor has 
the same general mental qualities as the captain. He speaks 
the same language, and there are a great many things which he 



III. 37.] ON COMPETITION AS DETERMINING PRICE. 253 

knows how to do better than the captain does. The superi- 
ority of the captain consists in this, that he knows how to 
navigate and direct the ship, while the sailor does not. This 
is a very small difference in itself. But, small as it is, it makes 
all the difference between conveying the ship safely to port 
and losing a million of dollars and a thousand lives by wreck- 
ing her. 

We have now to show how the law of supply and demand oper- 
ates in consequence of these great diversities in natural and ac- 
quired cajDacities. The question is, what cause determines the 
rate of compensation in any particular employment, or the in- 
come which a man can gain in any business. To avoid wander- 
ing through a wilderness of different occupations, let us take as 
examples the various operations necessary to the production of 
shirts. We shall then suppose a person to have his choice be- 
tween becoming a field-hand, a planter engaged in raising cot- 
ton, a cotton-broker, an operative, a manager of a cotton-mill, a 
dealer in cotton cloth, a manufacturer of shirts, or a shirt-dealer. 

If these different occupations could be equally well pursued 
by all men, it is evident that the most agreeable would be pre- 
ferred. The occupations of planter, manager, and broker are 
more agreeable than that of the operative, and the latter is 
more agreeable than that of the field-hand. Hence there would 
be more competition in the first three occupations than in the 
two last, and the field-hand would gain the highest income 
among all engaged in producing shirts. But we know that 
this is not the case. The reason is obvious. The number of 
people who are qualified to become brokers, managers, and 
merchants is very small, while the large majority of men are 
born capable of being trained for the position of field-hand. 
Were it not for this great diversity in natural capacities, we 
should have the singular result that the occupations we now 
consider the lowest would be best paid. 

To fix the ideas, let us suppose the number of people who 
are required to supply shirts to the population of New York 
City to be as follows : 



254 THE LAWS OF SUPPLY AND DEMAND. [III. 37. 

1,000 field-hands, 

50 planters, 

10 cotton-brokers, 

2,000 operatives, 

5 managers of factories, 

100 shirt-dealers. 

Suppose, however, that instead of the number of persons 

qualified to perform these functions in the best manner being 

in the same proportion, thej are in some such proportion as 

this : 

10,000 field-hands, 

40 planters, 

5 brokers, 
10,000 operatives, 

3 managers of factories, 
1,000 shirt-dealers. 
We see that there is a comparative scarcity in the number of 
persons qualified as planters, brokers, and managers. To under- 
stand exactly what this signifies, we must remember that, when 
we speak of the number being thus limited, we do not mean 
that only this number could by hook or by crook follow these 
occupations. "What we mean is that the number who can fill 
them in the most advantageous manner is thus limited, and 
that, in consequence of this, they can in a certain sense defy 
competition. 

To show what the result of this is, let us compare two 
cotton-brokers who at first sight may seem to be about equal 
in ability. But one is not a good judge of cotton, does not 
know what farmers are most to be relied on, does not know 
exactly what kind of cotton will bring the highest price, cannot 
well judge what the state of the market will be next year, and 
does not know the cheapest way of getting his cotton to the 
manufacturer. The other broker knows all these things. The 
skilful broker then outbids the other with the most honest 
farmers, birys the best kind of cotton, especially that kind of 
cotton which in a few months is going to rise in price, has his 



III. 38.] ON COMPETITION AS DETERMINING PRICE. 255 

stock well housed, and gets it to the manufacturer at a cheap 
route, and by a line of railway which is reliable in its manage- 
ment. The poorer broker outbids his keener neighbor with 
another class of farmers, buys cotton which is going to fall in 
price, finds that it is not of the quality which he expected, 
learns when too late that somebody has cheated him by putting 
stones inside the bales, has a lot of cotton damaged by getting 
wet, pays more for transportation to the manufacturer, and 
finds he has to sell it at a lower price because the market is 
glutted with that particular kind of cotton. At the end of the 
year he may find that he has made just $5 as the result of the 
year's business, while his more skilful neighbor may find that 
he has made $50,000. 

The same principle holds true in the management of the fac- 
tory. The poor manager buys the wrong kind of cotton at the 
wrong time, does not know how to mix it properly, gets it 
wasted, finds his machinery getting out of order, cannot make 
his operatives work together in the most advantageous manner, 
and does not know the right time to sell. If there were no 
other manager who could do better than he, he would still be 
able to live. But there may be a single competitor who will 
know how to arrange these matters by avoiding all waste and 
having all the operations conducted in the most advantageous 
manner. He will sell his goods at so low a rate as to drive 
his competitors out of business, and at the same time make 
a fortune for himself. Whether the breadstuffs and other 
products which are every year brought from the far West to 
the Atlantic seaboard shall cost $100,000,000 or only 
$80,000,000 for transportation depends entirely upon the skill 
of a few dozen railway managers. The managers who can 
bring them for $80,000,000 will drive the others out of busi- 
ness and make $20,000,000 profit for their companies. 

38. All these cases of special skill in business management 
are examples of a graduated monopoly of the same kind as 
that in the ownership of the soil. Let us imagine ourselves 



256 TEE LAWS OF SUPPLY AND DEMAND. [III. 39. 

able to measure and record the business ability of every man 
in the country. The result would be of this general nature : 
that a dozen men might be ranked in the highest class, a score 
or two in a class a shade below, a hundred in a third class, 
several hundred in a fourth class, and so on. Since there is more 
business than can be transacted by the half-dozen highest classes 
on this scale, it follows that the latter will be able to command 
or gain by their services an income proportionate to their su- 
periority over the lowest class that can make a living. These 
incomes will be gained by such wise management that the in- 
evitable waste of material and labor shall be reduced to a mini- 
mum, and that the product shall be what consumers most want. 

39. The principle involved can be seen in another case. 
Let us imagine that among a tribe of savages one man has 
learned to make first-class fire-arms and excellent gunpow- 
der. His fellows see how he does it, and they find that they can 
also make a kind of gunpowder and of fire-arms. But, through 
want of knowledge, what they make is so poor in quality that 
they can seldom get near enough to an animal to shoot it. 
The skilful man understands the chemistry of the subject so 
well that with his gunpowder and arms a buffalo can be shot 
before the animal sees the huntsman. Then the skilful man 
could, without injuring his fellows, charge for his services the 
whole advantage which he gave them. He could, perhaps, if 
the tribe was a thousand strong, charge for his powder and 
guns one half of all the game killed with them, and the rest 
of the tribe would find it more advantageous to pay this price 
than to use the best weapons they could themselves make. 
Morever, this bargain would not be to their disadvantage, since 
the skilful man could never command more from them than 
the value of the advantage he afforded. 



III. 40.] OF PROFITS AND COST OF PRODUCTION. 257 

CHAPTER VII. 

OF PROFITS AND COST OF PRODUCTION. 

40. At a first glance the term " cost of production " may 
seem perfectly definite and precise in meaning. When, in ac- 
cordance with universal practice, it is measured by money, it 
signifies the value of the labor and money which the producer 
must expend in order that an article may be produced. If for 
each yard of a certain kind of cotton the owner of a factory is 
obliged to pay out a certain sum of money for labor, materials, 
repairs, interest, etc., then the cost of production is said to be 
that sum per yard. When the cotton is sold, the excess of 
money received after paying all expenses connected with the 
sale is called profits, and is supposed to be the share received 
by the owners of the factory as the result of the skill, enter- 
prise, and capital which they have invested in the work. If we 
trace out what the factory pays, we find it to be divisible into 
wages and cost of material. But the materials which 
are purchased cost labor, and this labor has to receive its wages 
from the proceeds of the sale. Following the process backward 
step by step, it was found that everything paid for the manu- 
factured product might be divided into three parts, namely : 

I. Rent which was received by the owners of the soil from 
which the original materials were obtained. 

II. Wages paid for labor expended in production. 
When the manufacturer sells the product he must get both 

these items back again with a surplus, else he cannot continue 
business. The surplus is his share of the money received, and is 
called his profit. Thus we have a third element in the price 
of the product, namely — 

III. Profits, or the share of the gross amounts realized 
which constitute the gains of the manufacturer or employer 
of labor. 

17 



258 THE LAWS OF SUPPLY AND DEMAND. [III. 41. 

This was the theory of the leading economists a generation 
or two ago. But it fails to satisfy the requirements of the 
present time. It is now seen that rent and payment for any 
monopolized elements of production should be included in 
the same class. Hence if we are to consider rent as part of 
such cost, we should also include everything that the owners 
of mines, the organizers of labor, and the possessors of material 
limited in supply can command over and above the ordinary 
wages of labor. Again, the profits of the manufacturer are 
really his compensation for the skill and capital which he in- 
vests in his enterprise. In so far as they are' gains made- by 
the use of his organizing powers they are products of his labor, 
and therefore may be considered as wages when that term is 
used in its most extended sense (II. 34). That portion which 
represents profit upon the capital invested should be considered 
as interest on capital. Thus profits are divisible into the two 
parts wages, or gains by labor, and interest on capital. 

41. It is unnecessary to develop the subject from this point 
of view, because without greater precision the classification can 
serve no useful purpose. To show the difficulties in the way 
of a rule for estimating cost of production which shall suit 
everv case, let us suppose the possessor of a valuable bed of 
iron ore who has in his employ a chemist and an engineer, each 
possessing extraordinary skill in conducting the processes nec> 
essary to the smelting and casting of the iron which comes from 
his bed. Now, the way he would estimate the cost of produc- 
ing iron is this : " This bed of iron is of great value ; I should 
have to pay two hundred thousand dollars for it" (perhaps he 
did pay two hundred thousand to get it). " The annual inter- 
est on this money is ten thousand dollars. I have to pay sala- 
ries of ten thousand dollars each to two scientific experts ; an 
equal salary to a business assistant, whose services are of great 
value. I also have to pay great sums for the use of certain 
patents in the manufacture of steel. Moreover, my own or- 
ganizing ability and knowledge of the business are of great 



III. 42. J OF PROFITS AND COST OF PRODUCTION. 259 

value. Since they will on the average enable me to gain a 
large sum per annum, forty thousand dollars or more, I there- 
fore estimate them at that figure." Adding up all these items, 
he will obtain the cost of production per ton of the various 
kinds of iron which he turns out. 

A little consideration will show us that this cost of produc- 
tion will, in practice and in the long-run, mean very nearly 
the same thing as the price he can get for his iron. For if, 
during a long series of years, he can command a price very 
much above the ordinary cost of production, it must be because 
he possesses a monopoly of some kind, either in the quality of 
his ore, the skill of his assistants, or his own knowledge and 
organizing abilities. "Whatever this monopoly consists in, it 
will be valuable in proportion to the gains it enables him to 
secure, and its use will therefore be charged to cost of pro- 
duction. Nor can we stop him from doing this. He may sell 
out to another man all his monopolies except his own knowl- 
edge and skill, and may sell him the product of that knowl- 
edge and skill in so far as they are embodied in the organiza- 
tion of the work, for a sum proportioned to the gains of the 
establishment. Then, since the buyer has had to pay so great a 
sum of money, it is quite reasonable that he shall include all 
these items for which he has had to pay in the cost of produc- 
tion. 

42. There is, however, another sense in which we should 
make an entirely different estimate. It might be claimed that it 
cost a man nothing to use his own faculties or to manage his own 
capital. If his machinery would wear out as fast in standing 
idle as when running, we might say that it cost him nothing to 
run his machinery. So it costs the land-holder nothing to rent 
his land. The iron ore still under ground, though it may 
have been sold for millions of dollars, has never cost anybody 
anything except the trouble of finding it. The original discov- 
erer got a grant of it from the government ; he sold his rights 
to some one else ; the buyer sold them again, and thus they 



260 TEE LAWS OF SUPPLY AND DEMAND. [III. 42. 

passed from hand to hand, increasing in value as the richness of 
the ore became known. But this increase of value cost nobody 
anything more than the labor of learning the value of the ore. 

We may thus form a new conception of cost of production 
by not counting as such cost anything except the labor which 
has been actually devoted by men to the production, and valu- 
ing this labor by the same standard that we value other kinds 
of labor. In making this new estimate we leave out of consid- 
eration everything that is paid for monopolies of any kind. 
We therefore take from the cost the rent of land, the money 
paid for the bounties of nature, the high salaries of skilled em- 
ployes, and the gains which the owners make by their special 
skill. To distinguish this diminished cost of production from 
the one already described, we shall call it net cost. 

It is now necessary to have some criterion for determining 
what we shall consider the net cost. Snch a criterion is af- 
forded by economic science, and may be arrived at as follows : 
Let us suppose the price of a commodity to gradually and con- 
tinually fall from month to month and from year to year, with 
no hope of its ever again rising. A first approximation to the 
net cost of production to any individual producer, whether a 
person or a company, would then be the price at which the 
producer would abandon business entirely. 

A little reflection will show that this is a legitimate defini- 
tion from the second point of view just outlined. For no per- 
son or company can or will go on producing indefinitely at a 
loss. He may do so temporarily, hoping for prices to be higher 
in the future. But if they are never to be any higher, which 
is the case we have supposed, then the producer will immediately 
stop when he ceases to gain. 

It is evident that this stopping-point may be far below what 
is estimated as cost of production by the first method. In the 
first place, the millions of dollars which the unfortunate owner 
paid for the mine do not count at all. His mine is worth to 
him just what he can make out of it ; and it makes no differ- 
ence, so far as his interests at the present time are concerned, 



III. 42.] OF PROFITS AND COST OF PRODUCTION. 261 

whether he got it for nothing or paid a million dollars for it. 
If he can make any money out of it he will, and if he cannot 
he will give it up. In the next place, as he finds his profits 
diminishing, he will have to inform his skilled assistants and 
manager that they must either submit to a reduction of their 
wages or allow the establisment to go out of business. The 
result will be the reduction of all wages to the lowest point 
which will suffice to retain the services of the different grades 
of employes. If these employes are able to use their special 
skill in other pursuits with equal advantage, they will soon seek 
for such pursuits. But it is one of the marks of monopolized 
skill that it cannot generally be employed advantageously in 
many directions. The skilled employes of all grades would 
therefore have to submit to a greater or less reduction. Final- 
ly, if the owner or company themselves cannot advantageously 
change their capital, which, as a matter of fact, they may find 
to be the case, they will have to be satisfied as long as they are 
making a fair living. 

Let the reader not forget the object of this criterion for de- 
termining net cost of production. We are not showing that 
under any probable or conceivable circumstances would the pos- 
sessors of skill and capital be thus reduced to what would seem 
to them penury. We are supposing an ideal state of things : 
one in which the possessors of monopolies would be unable to 
command more than if they did not possess them. We are try- 
ing to divide what is commonly called cost of production into 
two parts : the value of special monopolies, and what is really 
paid for non-monopolized labor and services. We eliminate 
the monopolized elements by supposing the price to diminish 
until those elements cease to be of special value to their owner, 
at least in the particular direction in which they are used. 
Then we have the net cost of production as it would be were 
the most skilful business managers and other possessors of 
monopolized elements brought down to the general level of 
their fellow-men of the same class. 



262 THE LAWS OF SUPPLY AND DEMAND. [III. 43. 

43. The elements which enter into net cost of production 
as thus defined are : 

I. Wages, measured on the lowest scale for which any of 
the persons concerned would be willing to continue work. 

II. Interest on capital invested in the work. 

III. Taxes, insurance, and other miscellaneous items inci- 
dental to production. 

Whatever the producer receives for his products above the 
net cost of production thus defined may properly be considered 
as his profit. It includes the gains of himself and his imme- 
diate employes arising from their special skill, the interest on 
whatever money he may have sunk in the enterprise and be 
unable to command again, by sale or otherwise, as well as the 
gains from monopolies of every kind. No one knows, and no 
one can estimate with precision, what the profits are in any 
special case. We know by experience that there are certain 
products the prices of which are subject to great fluctuations 
from year to year. We also know that there are certain estab- 
lishments which continue in operation through a period of 
years at the lowest price, without any positive hope that prices 
will be higher in the immediate future. If prices do finally 
rise, it cannot be supposed that the net cost of production rises 
in anything like the same proportion. We may therefore fairly 
suppose that when prices are high the producers are gaining a 
profit not necessarily equal to the whole increase of price, but 
certainly equal to an important fraction of it. 



III. 44.] EQ UILIBMUM OF S UPPL T AND DEMAND. 263 



CHAPTER VIII. 

PRESERVATION OF EQUILIBRIUM BETWEEN SUPPLY AND DEMAND. 

44. Let us begin by supposing method of doing business 
quite different from that considered in the preceding chapters. 
If we visit a port in the East Indies, a trader will come on 
board with silks, cashmeres, and other products of the country 
for sale. The ship is then his market, and the passengers the 
buyers. But his price will not be fixed by any such consider- 
ations of the state of this market as enter into the calculations 
of the wholesale dealer ; his only object is to get the highest 
possible price from each individual passenger. If one pas- 
senger would be willing to give $100 for a shawl rather than 
go without it, another $60, and a third only $40, the trader 
would endeavor to get these separate sums for the same kind 
of a shawl from the three separate parties. In such a case, 
in the absence of any communication among the different 
passengers, the price would be merely the result of mutual 
guessing ; the trader trying to guess how much the passenger 
would give, and the passenger to guess how little the trader 
would take. There would therefore be no definable law to 
regulate the price. 

So far as the willingness and state of mind of buyer and 
seller are concerned, the same thing may be considered as 
holding true in all cases. There are in the community a cer- 
tain number of people who would give $20, $30, or $40 a 
barrel for flour rather than go without it. If their flour-dealer 
could keep them ignorant of the market price, he might exact 
this extreme limit of price for his flour. But the state of 
things which exists in the wholesale markets of every civilized 
country prevents any such operation. The general rule is that 
goods must be sold at the same price to all comers. A trader 



264 THE LAWS OF SUPPLY AND DEMAND. [III. 45. 

who should exact a higher price because his customer chanced 
to be for the moment ignorant of the market price would soon 
lose his business standing. It is only in the case of retail and 
short-sighted shop-keepers that the attempt is now practised. 
The result is that if any commodity is offered at a certain price 
P, the buyers will comprise all those persons who are willing 
to pay either P or any higher price. 

We now see from another point of view how it is that as 
price is lowered the demand increases. All the purchasers 
willing to give the higher price are retained at the lower price, 
and a certain number of additional ones are brought in. 

45. Graduated Cost of Production. It has been shown 
that if the net cost of producing a commodity exceeds the price 
it will command in the market, its production must cease. 
Hence the price asked must be above the cost of production 
by an amount sufficient to make good all the expenses con- 
nected with the sale in the market. Since whenever the price 
sufficiently exceeds the cost of production to make the latter 
pay well, the production will be increased, it might seem to 
follow that the selling price could never exceed the cost of pro- 
duction and sale. But this conclusion does not follow as a 
matter of course, because it rests on the supposition that the 
cost of production is a fixed quantity, and that the amount pro- 
duced can be increased indefinitely without increasing the cost 
per unit of the commodity. Were there no limit upon the 
quantity which could be produced at the lowest net cost, this 
would be true. But we have shown that monopolized elements 
enter, to a greater or less extent, into nearly every commodity. 
Since, by hypothesis, these elements are limited in supply, and 
are not at the command of every one, the effect of the monop- 
oly will be with every addition to the quantity to increase the 
cost of each unit added. 

In the case of monopolies of the raw materials of production 
which we have described in the last chapter, the general rule 
is this : A certain limited amount of the raw material can be 



III. 46.] EQUILIBRIUM OF SUPPLY AND DEMAND. 265 

obtained at a comparatively low net cost from some especially 
favored sources. If this quantity does not suffice for the 
supply, then it is to be sought for from less and less favored 
sources, and thus each unit will cost more. This is the mark 
of a graduated monopoly (§§ 25, 27), which is the most common 
kind of monopoly. In such a case, the quantity made to sell at 
a price P is all that can be made at a net cost not exceeding P, 
just as the quantity sold has been shown to be all that could be 
sold at a price not below P. To illustrate this, let us see how 
it may be with the production of iron. 

46. There may be in certain favored spots deposits of iron 
ore so rich in metal and so near the surface that pig-iron can 
be made from them at a net cost of $7 per ton. Prom other 
deposits or other portions of the same deposit the cost may be 
$8 per ton ; in the next class in order $9 ; and so on until we 
reach a cost above any limit we choose to set. 

Suppose now the market price to be $9 per ton. It is evi- 
dent that all those mines from which the iron can be made at 
a net cost less than $9 will pay for working them. If the price 
rises to $10 or $12, the less, favorable mines will be sought out 
and opened. If it falls to $8 or $7, the less favorable fur- 
naces will have to close, temporarily or permanently. The 
result then would be : 

I. The higher the price which can be got for the commodity 
the greater the quantity which will be produced. 

II. The price will be equal to the cost of production from 
the least favored mines. 

We shall hereafter see that the second rule is not the most 
general one. But we need not consider the exceptions to it at 
present. The final result of both the law of demand and the 
law of supply is that the price will be so fixed that supply and 
demand shall be equal. To show how the point of equilibrium 
is reached, we have supposed a state of things set forth in the 
table on the next page. 

In the table of demand the first column is a series of prices 



266 



THE LAWS OF SUPPLY AND DEMAND. [III. 46. 



per ton which are chosen quite at pleasure, and from which we 
may suppose the wholesale dealers, or the manufacturers, to 
select at pleasure in order to try the effects of each separate 
price upon sales and production. 

The second column gives the corresponding demand, that is, 
the number of thousand tons which it would be possible to sell 
at that price in a given state of the market during a given 
period. In order to avoid the use of large numbers we shall 
call 1000 tons the unit of quantity. We may suppose, to fix 
the ideas, that the market includes the whole United States, and 
that the period of time is one year. The first two columns 
then indicate that 50,000 tons can be sold in a year at $7 per 
ton, 48,000 at $8, and so on. 

In the table of supply the first column gives a series of the 
various costs of production per ton. 



Table of Demand. 


Table of Supply. 


Selling Price. 


Demand 

in Thousands of 

Tons. 


Cost of 

Production per 

Ton. 


Quantity which 

can be produced 

at that Cost. 


Total at Cost 
or Lower. 


$7 
8 
9 
10 
11 
12 
13 
14 


50 
48 
46 
43 
40 
36 
83 
29 


$7 
8 
9 

10 
11 
12 
13 
14 


10 
10 
12 
13 

15 
20 
20 
20 


10 
20 
32 
45 
60 
80 
100 
120 



The second column gives the quantity which we may sup- 
pose can be produced at each particular cost. That is, we 
suppose that 10,000 tons can be produced annually from those 
few favored mines which yield the product at $7 per ton ; 
10,000 from the next class, at $8 per ton ; and so on. 

The third column shows the total quantity produced at each 
cost or at less. It is formed by adding all the prices beside 
and above it in the preceding column. For example, $7 being 
the lowest price of all, it shows all that can be produced at that 



III. 47.] EQUILIBRIUM OF SUPPLY AND DEMAND. 267 

cost. Opposite $8 we have the 10 units which can be pro- 
duced at the cost of $8, and also the 10 which can be produced 
at $7, making a sum total of 20,000 tons at $8 or less. 12,000 
tons can be produced at the cost of $9, which added to the 
preceding makes 32,000 tons which can be produced at the rate 
of $9 or less ; and so to the end of the table. 

Note particularly that these tables show, not what actually is 
done, but what can be done under certain assumed conditions, 
and by fixing certain arbitrary prices for iron. To see what 
actually would be done, suppose the selling price were fixed 
at $9 per ton. The dealers would then be able to dispose of 
their stock at the rate of 46,000 tons per annum. But since 
they could not afford to pay the full price at which they sold, 
but perhaps 10 cents less, the producers would supply them 
only with the 20 units which could be produced at a cost less 
than $9 per ton. Buying only 20 units and selling 46, the 
stock on hand would diminish at the rate of 26 units per an- 
num, and the dealers would of course raise the price. At $10 
per ton they would sell at the rate of 43 units per annum. 
But this rise of $1 would only add to the supply the 12 units 
which can be produced at $9 per ton, so that the supply would 
now be 32 units per annum and the equilibrium would not yet 
be restored. At $11 per ton the sales would be reduced to the 
rate of 40 units per annum, while the supply would be 45, the 
13 units which can be produced at $10 per ton being now 
added. The supply would then slightly exceed the demand, so 
that the price under the conditions shown by the tables would 
be between $10 and $11 per ton. 

47. Modifications. This is an example of the law of equi- 
librium in its simplest form. By comparing it with the actual 
case the student will readily see what modifications are to be 
made in it to correspond to what actually takes place. The fol- 
lowing are the principal modifications : 

I. Neither of the two tables is to be considered as invari- 
able from year to year. The demand at a given price will be 



268 TEE LAWS OF SUPPLY AND DEMAND. [III. 47. 

greater in some seasons than in others, owing to the greater or 
less want of iron for railways or manufacturing purposes. In 
one year 46 units might be salable at $8 per ton, as supposed 
in the table, while in another year the sales at that price might 
be 50 units. But in any case we could make a table of the 
same kind as that given above which would hold good until 
there was a change in the demand. Every three months or 
every year we should need a new table. 

II. The cost of production from each mine may vary in 
the same way with variations in the price of labor and the cost 
of machinery. Moreover, the quantity which can be produced 
at any one price is not fixed as we have supposed it, because 
the managers of the furnaces can to a certain extent increase 
or diminish their production at pleasure. If the price of iron 
were only $7.50 per ton, the most favored producer would have 
no great stimulus to manufacture for so small a profit, and 
therefore might make less than ten units per annum, But 
when the price went up to $12 per ton the large profit would 
stimulate him to enlarge his works and employ more labor, so 
that he would produce at the rate of more than ten units per 
annum. 

On the other hand, this tendency is checked by the fact 
that any sudden change in the quantity produced is disadvan- 
tageous. A manager would rather run at a loss for a short 
time than discharge his workmen, and when the prices went 
up he might be unable to make any material increase of pro- 
duction without investing additional capital, and might not deem 
it worth while to make this additional investment. However 
these two opposing causes might operate against each other, 
the result would be in any case a relation of the same general 
character as that shown in the table. We therefore need a 
new table of supply as well as of demand every few months or 
every year. But in every state of the market there is always 
a possible table of the kind shown which expresses that state. 

III. Effect of Discounting the Market. The price is fixed 
by the dealers and producers, not merely according to the 



III. 47.] EQUILIBRIUM OF SUPPLY AND DEMAND. 269 

present state of the market, but its probable future state from 
the best information they can get or the best judgment they 
can form. If they foresee that next year a great number of 
railways will be built, they will be less anxious to sell now and 
will allow stock to accumulate on their hands for the sake of 
the prospective profit. But the general average result for a 
whole year or a series of years will not be altered (cf. § 19). 

IY. In many cases there may be no dealers at all, the produ- 
cers of the pig-iron selling direct to the manufacturers who use 
it. But this does not change the relation of things shown 
in the table. The functions of the dealers are then performed 
by the producers themselves, and since the prices are publicly 
known, the laws governing them are the same as when dealers 
fix them. 

Y. The modifications in the tables in case of no monopoly 
can readily be made. Suppose, for example, we could make a 
ton of pig-iron at a cost of $9 in labor, capital, and supervision ; 
that none could be produced at a less cost, and that any required 
quantity could be produced at that cost. The selling price 
would then be between $9 and $10 no matter what the de- 
mand. The only exception to this would be that in case of a 
sudden increase in the demand, the price would be temporarily 
raised, owing to the difficulty of suddenly increasing the supply 
to correspond to the new state of the market, while the reverse 
would be true when the demand diminished. 

Suppose next that the quantity were an insensitive one for 
which the demand varied very little from 43 units per 
annum, regardless of the price. The result would be that the 
first four orders of mines shown in the tables would be worked 
continually. The total amount produced would then be 
45 units per annum ; the selling price would be between $9 
and $10 per ton, because if we place it at $9 or less the fourth 
class of producers would drop out, and the demand could no 
longer be supplied. On the other hand, if the price exceeded 
$10 per ton, the fifth order of producers would enter in and 
the total production would be 60 units per annum, or IT 



270 TUE LAWS OF SUPPLY AND DEMAND. [III. 47. 

units more than could be sold. Since it would be impos- 
sible to sell the entire product, some one would have to stop, 
and of course it would be the unwise man of the fifth class. 

Combinations. In the case last supposed a combination 
might be made between the five classes of producers to 
charge $11.50 per ton and thus make it pay for the fifth man 
to continue the manufacture. But unless this combination in- 
cluded an agreement to diminish the total product pro rata, 
so as to reduce the whole amount produced to the 43 units 
demanded, there would be a continual accumulation on the 
hands of the producers. The first four orders of men would 
soon find it pay better to " freeze out " number five by lower- 
ing the price than to continue the combination. 

QUESTIONS. 

1. If, in the state of things set forth in the table of § 46, the product 
should be sold at $10 per ton net, what would be the profits made by the 
four orders who would supply the demand? 

[$30,000, $20,000, $12,000, zero.] 

2. The same state of things being supposed, if all the producers should 
combine, set the price at $12 per ton, and agree that the five orders of pro- 
ducers should each supply the same quantity of iron, what profits would 
they respectively make? [$36,000, $28,800, etc.] 

3. The same table of supply holding good, let the demand for iron so in- 
crease that double the quantity could be sold at the same price; that is, 100 
units at $7, 96 units at $8, etc. What would be the price and supply to 
produce equilibrium? [$12; 72,000 tons.] 

4. From the amount of advertising done by the makers of quack medi- 
cines, can you form any idea of the relation between the net cost of produc- 
tion and the selling price of their nostrums? 

5. Supposing the persons who use quack medicines always purchase the 
medicine recommended by the druggist who sells it, what effect would this 
habit have upon the druggist's rate of profit, upon the remuneration of his 
trade, and upon the number of persons who would become druggists? 

6. There is free competition in the production of a commodity C, but 
the producers have no facilities for selling to the public, and so have to 
sell to a particular dealer, who can charge the public what he pleases. How 
will the profits be divided between the producers and this dealer? 



III. 49.] EQUILIBRIUM OF SUPPLY AND DEMAND. 271 



CHAPTER IX. 

EQUILIBRIUM BETWEEN SUPPLY AND DEMAND IN THE CASE OF 
ABSOLUTE MONOPOLIES. 

48. Let us briefly review our mode of reasoning in the 
cases heretofore considered. We have regarded price as the 
determining cause fixing the amount both of the supply and 
the demand, and so fixing them that they shall be equalized. 
The general rule is that an increase of price not only dimin- 
ishes demand, but, as shown in the last chapter, stimulates sup- 
ply, so that the equilibrium can always be established by prop- 
erly adjusting the price. In showing how price stimulates 
supply, we have hitherto considered two cases : 

1. That of free and unlimited competition on equal terms, in 
which the supply can always be increased to meet any demand 
that may arise, without any increase in the net cost of produc- 
ing each unit of the commodity. In this case the price is fixed 
by the net cost of production. 

2. That of a graduated monopoly, in which there is a large 
competition, but not on equal terms, the favored producers 
having a superior command of some form of skill or natural 
agents. This case has been considered in the last chapter. 

"We have now to consider as a third case that of an absolute 
monopoly, held by one or a limited number of persons. 

49. Let us first suppose that a single individual or company 
has the exclusive command of some natural requisite of produc- 
tion, a mine of nickel or the right to make a patented machine. 
Then, having the sole command of the market, such a person can 
fix the price at his own pleasure. The law of averages will not 
be applicable, nor can we by scientific method lay down an abso- 
lute law as to what he will do. He may say he wants to keep the 



272 THE LAWS OF SUPPLY AND DEMAND. [III. 49. 

mine for his children, or to bequeath to them the patent-right. 
But although we cannot lay down a law of his action, we may 
assume that he will do what is most for his own interests ; that 
is, that he will fix such a price as will in the long-run yield him 
the largest profit. In determining what will be the largest 
profit various cases arise. If the quantity of the monopolized 
requisite is absolutely limited, the case will be different from 
that of a patented machine, in which there is no limit to the 
number of machines that the patentee may make. It is certain 
that the quantity of nickel contained in the earth is limited, so 
that by no efforts can more than a certain number of tons ever 
be produced. This fact must be kept in view by the owner, 
who may thus be led to confine his production to a certain defi- 
nite quantity per annum, no matter how high the price may rise. 
On the other hand, the owner of the patented machine has a 
motive for making as many machines as he can, subject to the 
condition of not bringing the price so low as to lessen his 
profit. 

Next imagine that instead of a single person there are two. 
These two persons may combine with each other by an agree- 
ment not to sell below a certain fixed price. In this case the 
result will be the same as if they were a single person, because 
the two are acting in fact as a single economic agent. If they 
compete, that course will tend to lower the price. Whether it 
will reduce the price to such a point that the monopoly in itself 
shall become valueless depends upon the quantity demanded, the 
price which the consumers are willing to give, and the net cost 
of supplying it. Suppose, in the case of the nickel mine, that 
each miner is producing regularly at the rate of one thousand 
kilograms per annum, and making a regular profit of x dol- 
lars. If he reduces the price, the demand upon him will be 
increased in two ways. The total amount purchased will be 
increased according to the first law of demand and price, and 
he will also attract customers from his rival. Suppose then 
that his rival does the same thing, and that a competition is 
thus established as to who sells the cheapest. Will the result 



III. 50.] EQUILIBRIUM OF SUPPLY AND DEMAND. 273 

be to bring the price to the lowest paying limit ? Not at all. 
Every increase in the supply will require additional laborers 
and capital, and when the competing parties find that the in- 
crease of their facilities is neutralized by the lowering of the 
price, neither of them will depress the price any further. 
Thus the two, like the one, may be expected in the long-run 
to fix the price at the figure which yields the largest profit. 

With only two competitors we may be sure that no competi- 
tion will ever last long, and that they will, either tacitly or by 
common agreement, fix a scale of prices, and thus act as if they 
were a single person. The greater the number of competitors, 
the more difficult it will be to have any such understanding as 
to price. As a matter of fact, however, it is well understood 
that among the great metal manufacturers of the country, and 
indeed among nearly all those who produce commodities on a 
large scale, attempts are made from time to time to establish 
agreements either about price or quantities produced. It is, 
however, difficult to make any general and precise statement 
on this subject, because the state of the case is constantly chang- 
ing. Agreements may be formal or informal, and each party 
sometimes adheres to them and sometimes breaks them. New 
competitors come in from time to time, and thus change the 
basis on which agreements were made. One thing can, how- 
ever, be said with certainty. The great staples of life which 
are really necessary to human advancement and welfare are 
not monopolized. For the monopolized articles the public can- 
not be compelled to give more than they are willing to give, 
and every rise of prices leads to less of the article being sold. 
Fortunately for the interests of mankind, absolute monopolies 
of insensitive products are quite exceptional. 

50. The most common case of an absolute monopoly is that 
of patented machines. As a general rule these machines are 
things that people can readily go without, or find substitutes 
for. They are therefore to be regarded as sensitive commodities. 
To illustrate this, let us suppose that it is possible to sell in a cer- 
18 



274 



TEE LAWS OF SUPPLY AND DEMAND. pil. 50. 



tain city 100 sewing-machines of a certain patent at the price 
of $40 each, and that, for every dollar above $40 added to the 
price, there is a falling off of five machines per annum in the 
sales. Then at the price of $45 the sales would fall off to 75, 
and finally at the price of $60 nobody would buy the machines. 
The number salable at each price is shown in the first two 
columns of the following; table : 



Price. 


Demand. 


Total Amount 
received. 


Cost. 


Profit. 


$40 


100 


$4000 


$3000 


$1000 


45 


75 


3375 


2250 


1125 


50 


50 


2500 


1500 


1000 


55 


25 


1375 


750 


625 


60 













The patentees can fix the price at pleasure. But, in accord- 
ance with the fundamental law of human nature on which 
economic science is founded, we suppose them so to fix it that 
they shall receive the largest income. To show how the in- 
come derived from different quantities of manufacture may be 
arrived at, let us suppose the cost of the machines, exclusive of 
interest upon the permanent original capital invested, to be $30 
each. Then if the selling price is fixed at $40, the cost of the 
100 machines which can be sold will be $3000, as shown in the 
fourth column of the table, and the profits will be $1000, as 
shown in the last column. If the price is raised to $45, they 
can sell only 75 machines ; the cost of these 75 machines being 
$2250, the profits will be $1125. If they put the selling price 
at $50, they can dispose of but 50 machines annually. The 
cost of these machines will be $1500, and the profits will be 
$1000. If they put the price at $55, they will sell but 25 
machines annually, which will cost them $750, and their profits 
will be reduced to $625. At a price of $60 they will sell no 
machines at all, and therefore can do no business. 

To correspond to the actual case in business we should of 
course make allowance for the cost of selling, which in such 



III. 51.] EQUILIBRIUM OF SUPPLY AND DEMAND. 275 

cases is considerable. If this cost is a constant premium on 
every machine sold, we have to add it to the price of the ma- 
chine. If it is a percentage of what the machine sells for, we 
may deduct this percentage from what the machine sells for in 
the first column. In any case it is a simple matter to make 
the necessary changes in the calculation, and we need not de- 
scribe the process, because our object is to show the principle 
involved, which will best be seen by putting the case in the 
simplest form as shown in the table. 

Since in each case the selling price must depend upon the 
will of the manufacturer, we cannot lay down an absolute and 
necessary law about it. But, for reasons already dwelt upon, 
the price concluded by the political economist will be that 
which secures to the manufacturer the largest profit ; that is, 
in the case supposed, it would be $45. 

5 1 . Case in which the Supply is absolutely limited. Not 
only may the whole supply of a commodity or facility be in the 
hands of one or a few persons or companies, but it may be 
incapable of increase beyond a certain definite limit. One ex- 
ample of this case is that of an ocean telegraph cable without 
other cables to compete with it. Only a certain number of 
words can be sent over the cable daily, and the cost will not be 
materially diminished by any diminution in the number sent. 
In this case we can establish a normal price which tends most 
to the public benefit, but which may not be the price most 
profitable to the owners of the cable. Since the lower the 
price the greater the number of messages, a price may be estab- 
lished at which messages enough will be demanded to keep 
the cable constantly employed. This may be called the normal 
price. Let us suppose first that the demand for sending mes- 
sages is comparatively insensitive, as shown in the table on the 
next page. 

The first column shows the price per word taken at pleasure. 
Opposite each price is given the supposed number of words 
which senders will demand to be sent at that price per day ; 
the last column shows the total receipts. 



276 THE LAWS OF SUPPLY AND DEMAND. [III. 51. 



Price per 


Number of Words 


Total Daily- 


Word. 


demanded per Day. 


Receipts. 


$2 40 


5,000 


$12,000 


2 20 


5,500 


12,100 


2 00 


6,000 


12,000 


1 80 


6,500 


11,700 


1 60 


7,000 


11,200 


1 40 


7,500 


10,500 


1 20 


8,000 


9,600 


1 00 


8,500 


8,500 



If the cable can send words without limit, the most profit- 
able price per word would be about $2.20, at which price about 
5500 words would be demanded, and the daily receipts would be 
$12,100. But suppose that not more than 5000 words can 
possibly be sent. Then it would be most profitable to send this 
maximum number and keep the cable constantly employed. 
The price leading to this result would be $2.40. Suppose, 
however, that if the company pleased it could send 8000 words 
per day and no more. Then it would be most for the public 
benefit to fix the price at $1.20 per word, at which price the 
cable would be constantly employed. But the daily receipts 
would be only $9600. 

The price actually charged might range anywhere between 
the extremes $1.20, the normal price, and $2.30, the price most 
remunerative to the company. If the company is chartered by 
the government and receives favors from it, the normal price 
is that which should be fixed, provided the company is willing 
to lay the cable on that condition. 

The question may be asked : Suppose the company can make 
a profit by sending the messages" at $1, or even 80 cents, per 
word ; would it not be better for the public to fix the rate at this 
lower price ? The answer of the economist is, No. By hypo- 
thesis, the company can only send 8000 words per day. If the 
price is fixed at 80 cents, people will be coming in with 9000 
words per day, so that there will be 1000 which cannot possibly 
be sent. In this case a selection must be made. On what prin- 
ciple shall we select the 8000 which are to be sent from the 



III. 51.] EQUILIBRIUM OF SUPPLY AND DEMAND. 211 

9000 demanded ? Clearly the answer is that we should select 
the 8000 which are the most important. But how shall we 
determine which are the most important % Sentimentality aside, 
there is but one possible way. The most important messages 
are those for which the senders are willing to pay the most. 
Hence the only course would be to find the senders of those 
8000 words who are willing to pay the price of $1.20 per word. 
The only way of doing this is to charge $1.20 and to let the 
senders of the 1000 words who are not willing to pay this price 
give way to the others. No injustice is thus done, because no 
one need pay money unless the service is worth it, and it is 
perfectly right that those persons to whom the service is worth 
less than $1.20 per word should give way to those to whom it 
is worth more. 

Another case of limited supply is that of the seats at theatres 
and other places of public amusement. There are, of course, 
only a certain definite number of seats at such places. The 
price of tickets may be so low that more people will demand 
them than can be supplied with seats, and they may be so high 
that many seats will be left empty. The normal price is that 
at which the demand will be just equal to the number of seats, 
and the general good is best subserved by this price. But this 
normal price will vary from time to time according to circum- 
stances, rising higher when a celebrated actor is to appear, and 
falling when nothing of especial interest is presented. If the 
price be put much below the normal price, the tickets will be 
purchased by speculators with a reasonable probability of selling 
them again at a profitable advance. 

The professional services of the lawyer or physician come 
under the same category. The physician can properly attend 
only a limited number of cases. If his fees are below a certain 
amount, which depends upon his reputation, the demand for 
his services will be greater than he can supply. If his charges 
are too high, he will remain a greater or less portion of the day 
idle. The normal price is that at which the demand will be 
equal to his power of attending patients. 



278 THE LAWS OF SUPPLY AND DEMAND. [HI. 53 

CHAPTER X. 

INTERNATIONAL SUPPLY AND DEMAND. 

53. The operations of international supply and demand 
are governed by the same general principles with those which 
govern home supply and demand. The differences between 
the productive capacities of different countries are of the same 
general nature as between different iron or coal mines. There 
are, however, certain modifications in the application of these 
principles of which the following is the one chiefly to be con- 
sidered. In domestic trade and manufacture laborers can pass 
from one establishment to another, and capital can pass from 
one employment to another, with comparative freedom. The 
various machine-shops and railways compete with each other 
in the price they offer for goods and the wages they offer to 
their employes. We may thus imagine a certain level or 
equilibrium between the different employments in a country. 
Any disturbance of this equilibrium will very soon be cor- 
rected. Thus each country, considered separately, will enjoy 
this equilibrium within its own limits. 

But it does not follow that the equilibrium will hold between 
different countries. There is no competition between a farm- 
hand in China and one in the United States, and therefore no 
tendency to an equality of wages between them. 

53. Let us now suppose a number of countries in each of 
which an industrial organization of its own lias grown up, but 
which have never had any communication with each other. 
To make this supposed case merge as nearly as possible into 
the real one, we shall suppose that these different countries all 
use the same kind of money ; which money, for simplicity, we 
may call gold. Then there will be in each country a certain 
scale of prices for all the commodities it produces ; and this 



III. 53.] INTERNATIONAL SUPPLY AND DEMAND. 279 

scale will be determined in each case by the laws of equilibrium 
between supply and demand which have already been laid 
down. Suppose now that some two of these countries discover 
each other, and that free communication is opened up between 
them. Of course absolutely free communication is not practi- 
cable, because labor is required to transport goods across the 
ocean or other intervening region. For the sake of sim- 
plicity, however, we may first suppose transportation to cost 
nothing. To begin with an extreme case, let it be found that 
the prices in gold of all commodities in one country are higher 
than in the other. The country of higher prices will then 
begin by making all its purchases from the cheaper country, 
paying for them in gold. The result will be a scarcity of gold 
in the one country and a plenty in the other. This will result 
in a fall of prices in the one and a rise in the other, until the 
two scales are brought into approximation (§ 21). 

Of course the general inequality of prices which we have 
just supposed is something which never exists under our present 
arrangements ; because, as a matter of fact, communication be- 
tween countries has always been more or less free, and thus 
no general inequality between the scale of prices in different 
countries has ever had a chance to exist. In other words, the 
equilibrium to which, in the state of things which we have sup- 
posed, the prices would ultimately attain is that to which they 
really do approximate, so far at least as concerns those goods 
which pass between the two countries. 

The question now is where the excess of purchases by the 
dearer country would stop. We suppose that everybody in 
each country buys where he can get his goods the cheapest. 
So long as this mode of buying results in a greater value of 
goods being conveyed from A to B than is conveyed in the 
reverse direction, so long will gold to pay for them continue to 
flow out of B into A, and so long will prices continue to fall in 
B and to rise in A. This rise and fall will stop as soon as 
equal values are transported in each direction between the two 
countries. 



280 THE LAWS OF SUPPLY AND DEMAND. [III. 54. 

54. Relative Advantages of Different Countries in Pro- 
duction. If, when an equilibrium is reached, the price of each 
individual commodity is the same in the two countries, all trade 
between them will cease, because there will be no inducement 
to transport goods from one to the other. The prices will be 
equal unless one country has a relative advantage over the other 
in the production of special commodities. An example of what 
is meant by relative advantage is this : If in each country the 
cost of producing ten yards of cotton is the same as that of 
producing one bushel of wheat, then, no matter what that 
cost is, neither country will have any advantage in the relative 
production of wheat and cotton. It may cost twice as much 
to produce both the wheat and the cotton in one country that 
it does in the other, but in this case the advantage is an abso- 
lute and not a relative one. If it costs just twice as much 
labor to produce each separate commodity in one country that it 
did in the other, there would be no relative advantage between 
any two commodities, and therefore, in the case supposed, 
no trade between the countries. Wages of all kinds would be 
twice as high in the more favored country, but this would not 
lead to any trade or competition. There would be, indeed, an 
inducement to emigrate from the less favored country to the 
other, which tendency would, however, execute itself with com- 
parative slowness, owing to the indisposition on the part of 
men to change their country. We have therefore, in our 
present discussion, nothing to do with the general advantage of 
one country over another in production, but only with its rela. 
tive advantage in producing one commodity rather than another. 

From what has been said we see that this relative advantage 
would, in the case of free trade between the two countries, be 
indicated not only by the relative prices of different commodi- 
ties, but by their actual prices. If wheat is cheaper in America 
than in England, it shows that we have a relative advantage in 
producing wheat over producing the common run of commodi- 
ties which are transported between the two countries ; while if 
iron is cheaper in England, it shows that England has a relative 



III. 55.] INTERNATIONAL SUPPLY AND DEMAND. 281 

advantage in the production of iron. Bnt this fact gives us no 
clue to the rate of wages in the two countries, which may differ 
to any extent without impairing the equilibrium of prices. The 
exchanges between the two countries show that America has a 
relative advantage over England in the production of bread- 
stuffs, pork, cattle, cotton, leather, tobacco, and some dairy pro- 
ducts. England has a relative advantage in the production of 
spool-thread, woollen goods, and a great variety of manufac- 
tures of small articles in common household and family use. 
The result is a continual flow of the former in one direction 
over the ocean, and of the latter in the other direction. 

55. Balance of Trade by Foreign Exchange. In a former 
chapter it was shown how international trade is balanced by the 
use of foreign exchange on the part of bankers (II. 95). If the 
value of our imports from England exceeds that of our exports 
to that country, there will be, as already shown, a demand in 
the New York market for exchange on London in excess of 
the supply. In accordance with the common law of supply 
and demand, the New York bankers will then raise the price 
of exchange on London. The question now arises to what limit 
the price may rise. The answer is that the limit is determined 
by the fact that the New York debtor lias always the privilege 
of making payment by sending coin across the Atlantic. If 
then the premium charged by the bank is in excess of the cost 
of freight and insurance, coin or bullion will be exported. The 
ratio between the amounts of metal in the English pound and 
the American gold dollar are such that the bullion value of the 
former is $4.86 65. It is found by experience that when the 
New York bankers charge a higher price than $4.90 for ex- 
change on London our merchants begin to export bullion. Per- 
haps at a rate one cent above this, all payments would be made 
in bullion and no foreign exchange would be bought. The gold 
will flow out in payment until the fall in prices consequent 
upon the outflow stimulates the exportation of other commod- 
ities than gold, and then the balance will be restored. 



282 TEE LAWS OF SUPPLY AND DEMAND. [III. 55. 

Suppose, on the other hand, that our exports are in excess of 
our imports. Then the merchants in New York who possess 
credits in London will exceed those who owe debts there. 
Thus the supply of foreign exchange by the former will exceed 
the demands of the latter, and the bankers will find exchange 
on London accumulating on their hands. In accordance with 
the law of supply and demand, they will lower the price in 
order to stimulate demand and discourage the supply. The 
limit will, however, be reached on the same principle as in the 
opposite case. Whenever the price offered by the banker falls 
so low that it will pay the New York creditor better to ask his 
London debtor to send coin across the Atlantic than it will to 
sell the debt, then coin will begin to come. This limit of price 
ranges from $4.83 to $4.84. If the excess of imports contin- 
ues, the inflow of coin will result in an increased volume of 
currency on this side of the Atlantic, which will lead to a rise 
in prices and thus stimulate importations from abroad. 

Of course the flow of gold from England will tend to make 
prices low there and thus stimulate exports to America. 
Thus the foreign exchanges both of gold and commodities 
always tend towards an equilibrium which, however, is con- 
tinually being disturbed through the action of changing eco- 
nomic causes in each country. For a few weeks or months 
there will be an excess of imports, followed by a corresponding 
demand for foreign exchange or for gold to send abroad, while 
at other times the state of things is the opposite. 

The one condition which is always to be fulfilled to pro- 
duce equilibrium is that equal values shall pass in the two 
directions. It does not follow either that equal weights or 
equal numbers of different kinds of commodities shall pass. 
One country may have a great advantage in the production of 
a single commoclity and no more. If wheat is the commodity 
which we can produce to the greatest relative advantage, and 
if the quantity which we can produce is sufficient to buy our 
whole supply of those foreign commodities in the production 
of which other nations have a relative advantage, then we 



III. 56.] INTERNATIONAL SUPPLY AND DEMAND. 283 

should export nothing but wheat. The people of Switzerland, 
by a system of training extending through many generations, 
have acquired a great advantage in the manufacture of watches. 
The result is that little except watches is exported from that 
country in exchange for many kinds of products imported. 

56. Tax and Cost of Transportation. In the preceding 
discussion we have supposed transportation to cost nothing, and 
trade to be perfectly free. We have now to inquire how our 
conclusions must be modified when we allow for the cost of 
transportation and for the duties which have to be paid on im- 
ports. As a result of this cause the relative prices of commodi- 
ties will always be higher in the country to which they are 
exported, and as a consequence equal values according to the 
scale of prices in each country cannot pass. If, for example, 
the imports into New York should equal the exports in value, 
then it is certain that those imports are worth less when they 
leave England than when they are landed in New York. And 
because the exports are worth more when they reach England, 
it follows that, as measured in England, the value of the im- 
ports would be in excess. How then is the equilibrium to be 
defined ? 

To answer this question, let us suppose that both exports 
and imports are carried in foreign ships to and from the port 
of New York. Then in order that the accounts of the New 
York merchants with other foreign correspondents may be ac- 
curately balanced, it is necessary that the value of the goods 
as received from the ship shall equal the value of those ex- 
ported, at the price paid in New York by the London purchaser 
of the exports. Let us call this equal quantity P. Then when 
this value P of exports reaches London it will be valued at a 
higher price, the addition being represented by all the cost of 
transportation, insurance, and interest on capital. If this cost 
be D, the value delivered in London will be P -j- D. If the 
cost of sending the goods back from London in payment be 
H, then it is only necessary to send the value P — H from 



284 THE LAWS OF SUPPLY AND DEMAND. [III. 57. 

London in order to make the value P in New York. Thus as 
measured in London the value of the imports will exceed that 
of the exports by D -f- H. This quantity D -f- H will represent 
the total cost to the English shipper of carrying the goods in 
both directions, including all profits upon the transaction. If 
the cost of transportation were entirely incurred by the New 
York dealers, the result would be that to balance the account 
the exports and imports should be equal as valued in England, 
while the imports would be in excess as valued in New York. 
It is therefore practically impossible to strike a mathematically 
exact balance in the case. In theory, however, the balance is 
obtained by subtracting from the price of the imports the sums 
paid by the importer for the cost of transportation, and adding 
to the cost of exports whatever he pays towards transporting 
them. Modifying the sides of the account in this way, the 
exports and imports should balance on both sides, provided no 
gold is to be transported in either direction. 

57. We thus reach a very simple theorem concerning the 
balance of foreign trade. Since the excess of imports into 
each country must be paid for in coin, it follows that if we 
include the value of the coin or bullion paid with that of the 
exports, and if we include coin and bullion among the imports, 
then the sum total of imports and exports must in the long-run 
balance each other. This qualification "in the long-run" is im- 
portant, because there is no necessity that the balance should 
be struck every day or every month, or even every year. A 
nation may go on for some time increasing its debts abroad 
simply by the home merchants deferring payment. Thus there 
is always a fluctuating mass of indebtedness from the merchants 
of one country to those of another which may sometimes go 
on increasing for years. As a general rule, however, this in- 
debtedness does not increase indefinitely, but is being paid off 
from time to time. If it has grown in one year, it probably 
will diminish in the year following. 

Of course the supply and demand for foreign exchange cor- 



in. 58.] INTERNATIONAL SUPPLY AND DEMAND. 285 

responds to the payment of indebtedness on the two sides, and 
not to its being incurred. That is to say, a New York im- 
porter does not demand foreign exchange when lie becomes in- 
debted to his London correspondent, but when he has to pay 
that indebtedness. 

58, Although the preceding theory is exact when we make 
all due modifications in its application, yet the student must 
be warned against supposing that any official statement of the 
total values of imports and exports will accurately represent 
the theory. The precise value of goods is always indefinite, 
and becomes necessarily greater with every step the goods take 
towards their destination. A bale of cotton is worth more on 
board a ship in Charleston harbor than it was on the wharf. 
And a bale of broadcloth, when brought to New York, is 
worth more after being landed on the wharf than while it was 
in the ship. The prices of goods also fluctuate from day to 
day, and it would be impossible to formulate any system which 
would be exact from an economical point of view, without an 
examination of every merchant's ledger to find what all his im- 
ports actually cost him in every way. For this reason statisti- 
cal tables of the values of imports and exports are not to be 
regarded as mathematically exact, but only as rude approxi- 
mations to the actual values. 

In the case of gold and silver bullion, however, the num- 
bers may be regarded as sufficiently exact for all practical pur- 
poses, and they afford the best test of the actual balance of 
trade. If during a series of years we find that more gold is 
exported from any country than is imported, we may conclude 
that there is a corresponding excess to the home value of im- 
ports of other goods, and vice versa. But even in this case the 
completeness of the tables is always open to challenge. Coin 
and bullion may be imported by passengers arriving from 
abroad without being reported to the authorities, and the prin- 
ciples of economics may settle the question of the balance of 
trade better than statistics. 



286 THE LAWS OF SUPPLY AND DEMAND. [III. 60. 

59. Total Balance of Trade with all Countries. Hitherto 
we have considered interchange between two countries only. 
But it does not at all follow that the value of our imports from 
any one country must equal that of the goods which we re- 
turn to it. During the year 1883-4, for example, our imports 
from Brazil were 50 millions of dollars, while our exports to 
Brazil were only 9 millions. Our trade with France, Austria, 
and the East Indies and many other countries shows an excess 
of the same kind. On the other hand, our imports from Great 
Britain were 163 millions, and our exports to that country were 
386 millions. This, however, forms no exception to the rule 
when we extend the latter to include sums total. Our total 
imports from all countries were valued at 668 millions, and our 
total exports at 740 millions. This difference is partly to be at- 
tributed to the defects of the official system of valuation, partly 
to the indebtedness incurred by foreigners to our merchants, 
and partly to the profits gained by the latter through the ex- 
change. The inequalities in the relations of the different coun- 
tries are accounted for by England paying Brazil and France 
for what they export from those countries, and charging it 
against the value of what she receives from us. The case is 
exactly the same as between individuals. If A purchases from 
B, B from C, and C from A, and the values are equal, the 
commodities are paid for by simply cancelling the accounts 
without any money passing between the parties. The opera- 
tion is, in principle, identical with the balancing of bank in- 
debtedness at a clearing-house (II. 92). 

60. Theories and Nomenclature of the Balance of Trade. 
When it is found that the total value of the goods imported 
into a country exceeds the total value of those which it ex- 
ports in exchange, the balance of trade is said to be against that 
country. This form of expression may surprise the young 
economist, since it implies that a nation is more favorably 
situated the greater the value of the goods which it sends 
abroad and the less the value which it receives in payment. 



III. 60.] INTERNATIONAL SUPPLY AND DEMAND. 287 

It is a relic of the old " mercantile system" of two centuries 
ago, and is based on two principles then in vogue. 

The first of these principles was that a nation was rich in 
proportion to the amount of gold and silver which it possessed. 
Accordingly, the policy of the leading mercantile countries was 
shaped by a constant effort to get as much of these metals as 
possible into the country, and to prevent them from leaving it. 
Since, as jnst shown, the metals would be received in payment 
for any excess of exports over imports, it was considered that 
an excess of exports encouraged the importation of money, 
while the opposite state of things implied its exportation. 

The second principle was that a nation was impoverished in 
proportion to the amount of labor expended on any imported 
product by the foreign producer. For example, when it was 
found that a product which only cost an English manufacturer 
one day's labor could be sold in Portugal for two or three days' 
labor of a Portuguese, it was held that the exchange was dis- 
advantageous to England. This principle combined its force 
with the other in leading governments to look unfavorably on 
an excess in the value of their imports. 

At the present time the expression " favorable balance of 
trade" implies to those who use it an increasing indebtedness 
from foreign countries. It is not a good thing to be in debt, 
but it is supposed to be a good thing to have others indebted 
to us. Statesmen like to see our exports exceed our imports, 
because that seems to imply either that our indebtedness is 
being paid off, or that foreigners are running in debt to us. 
Since, however, this indebtedness is not public, but private, the 
parties can be safely left to take care of it for themselves. 

In the long-run the relation of the export to the import of 
the precious metals to and from any country must depend on 
whether that country is a large producer of them. A consid- 
erable part of the annual gold-supply of the world comes from 
California and Australia. These countries may therefore in 
the long-run be supposed to export more gold than they im- 
port, because the supply tends to diffuse itself over the world 
in proportion to the needs of different countries. 



288 THE LAWS OF SUPPLY AND DEMAND. [III. 61. 

61. Advantages of International Trade. The advantages 
of international trade are that the people of each country have 
a larger field from which to supply their wants than they would 
have were they to depend entirely upon their own resources. 
If all countries were alike in their productive capacities, no in- 
ternational trade would arise. The inequalities which give 
rise to trade are both natural and artificial. In trade, countries 
share these advantages with each other. For example, it is 
found that there are certain kinds of foreign wool which when 
mixed with American wool will make a far better cloth than 
the latter will make alone. By importing this wool we make 
our own more valuable. It is also found in metallurgy that 
there are certain foreign ores the addition of which to our own 
greatly facilitates the process of manufacture. Our metal- 
lurgists therefore seek for these foreign commodities. Nearly 
all the platinum of the world is found in or around the Ural 
Mountains. If it could not be exported, no other nation than 
Russia would have the use of it. 

The principle is the same in the case of artificial powers or 
products. Our inventors have by peculiar skill and applica- 
tion brought the sewing-machine to great perfection. With- 
out foreign trade the advantage of the skill that they have ac- 
quired in making these instruments would be enjoyed only by 
ourselves. But by exporting these machines other nations 
share these benefits with us. Our cotton helps to clothe the 
whole world, and our breadstuffs to feed large portions of it. 
In return for this we get the benefit of any peculiar skill that 
may be acquired by the inhabitants of any other countries. 
The products of Chinese and Japanese art are found in many of 
our houses. The skill acquired by the English manufacturer 
of cloth is available to clothe us. The mere fact that a country 
is less rich in natural wealth than another may make its services 
available. ~No civilized country is so poor that it cannot in 
some way assist us in supplying our wants. As the poorest 
classes among us can perform menial services for us more ad- 
vantageously than we can perform them for ourselves, so the 



in. 61.] INTERNATIONAL SUPPLY AND DEMAND. 289 

inhabitants of countries less fortunately situated than our own 
are ready to supply us with many commodities more cheaply 
than we can afford to make them for ourselves. As some 
people are so wealthy as to command nearly everything they 
want without irksome labor, so we might imagine a country 
so rich in natural wealth as to have most of its wants requiring 
disagreeable labor supplied by its neighbors. In a word, the 
social organism does not comprise the people of one country 
alone, but of the whole civilized world, who are all engaged in 
supplying each other's wants. 

ILLUSTRATIONS AND EXERCISES. 

1. Investigate the effect of the following causes upon the price of ex- 
change on London in the city of New York, showing in each case whether 
the effect will be to make exchange dear or cheap for the time: 

1. During a period of one year American merchants import more goods 
from England than they export, but run in debt for the excess. 

II. During the year following they pay off this indebtedness. 

III. Owing to the rate of interest being higher than in Europe, London 
capitalists invest in American securities. 

IV. Owing to the rate of interest being higher in London, American in- 
vestors purchase British securities. 

V. A war in Europe leads the contending parties to purchase large sup- 
plies of food, military accoutrements, and weapons from the United States. 

IV. In consequence of goods being dearer in Europe than in America the 
exports from America largely exceed the imports. 

VII. The quantity of gold mined in America is in excess of our own 
wants, and is therefore regularly exported to London. 

VIII. The mining of gold and silver diminishes so that we have to im- 
port bullion from London. 

2. Consider the great difference between the natural advantages of differ- 
ent countries for the production of the great staples of life. Name several 
such staples which can be produced advantageously only in certain coun- 
tries. Also name, so far as you can, those commodities which can be pro- 
duced as well in one place as in another. Then show in what countries 
will people most devote themselves to the production of this last class of 
commodities, and illustrate your theory by such instances as you are ac- 
quainted with. Can you thus explain the fact that there are many com- 
modities which will not be made at all in the United States, unless their 
importation from abroad is impeded by a protective tariff ? 

19 



290 THE LAWS OF SUPPLY AND DEMAND. [III. 63. 



CHAPTER XL 

EFFECT OF TAXES ON PRODUCTION UPON SUPPLY, DEMAND, AND 
INTERNATIONAL TRADE. 

62. The general policy of different forms of taxation, 
that is, the consideration of the effect of taxes upon the in- 
terests of society, belongs to the application rather than to the 
theory of economics. At the same time, a tax levied by gov- 
ernment is an economical cause, the effects of which are to be 
investigated by the same methods that we employ in the inves- 
tigation of other causes. The consideration of taxes is there- 
fore a legitimate branch of pure economics, which we shall 
now enter upon so far as necessary for the purpose of round- 
ing out the subject. 

The only taxes which we need consider for the present pur- 
pose are those levied upon production; that is, the taxes which 
a producer may be obliged to pay as a consequence of having 
added to wealth. Since transportation is an act of produc- 
tion, it follows that import duties are to be included in our 
list. As a matter of fact, import duties are the only taxes 
upon production which are at all popular. But most govern- 
ments are obliged also to levy taxes upon particular home 
products, especially alcoholic liquors and tobacco. All such 
taxes produce their effect through the laws of supply and 
demand, and the method of investigation is the same in all. 

63. To begin with a simple case, let us suppose that a 
country has, up to a certain point, had no occasion to levy a 
tax upon tobacco. A necessity for increasing the revenue 
arises, and the government determines to levy a tax on all to- 
bacco produced. Let this tax be fixed by a percentage of the 
value of the tobacco, and, for convenience, let us suppose it to 
be payable when the tobacco is produced. 



III. 64.] EFFECT OF TAXES ON PRODUCTION. 291 

Now, the first conclusion we draw is that the immediate 
economic effect of the tax is the same as that of an increase 
in the cost of producing tobacco. For, so far as the producer 
of tobacco is concerned, it makes no difference to him whether 
the money which he pays goes as tax to the government, or to 
some land-owner or laborer who helps him in his work. In 
both cases it is a sum which he has to pay out as a condition 
of producing, and is therefore regarded by him as an addition 
to the cost of production. The question now is, What change 
will this tax produce in the supply and the demand ? The first 
factor in the case will be the producer, with whom therefore 
we commence to trace out the effect. 

It is certain that the first thing that the producer will at- 
tempt will be to add the tax to the price at which he sells his 
tobacco. This addition must be made by all through whose 
hands the article passes, and thus the consumer of tobacco will 
find an attempt to charge him a higher price for it. JSTow 
two cases may occur, depending on whether tobacco is or is 
not an insensitive commodity. 

If tobacco is an insensitive commodity (§ 15), that is to say, 
if the consumer will buy as much at the higher price as he 
formerly bought at the lower price, then no further change 
will occur in the conditions. The manufacturer and seller of 
the tobacco, finding this same demand under the increased price 
as they did before the tax was levied, will go on manufacturing 
the same quantity as before, and will make the same net profits. 
We may therefore lay down the law : 

A tax upon an entirely insensitive product is wholly paid 
l>y the consumer, no matter what the conditions of production. 

64. But the case of an absolutely insensitive product is an 
extreme one, which we can hardly consider to have an actual 
occurrence. It is certain that some people will economize in 
the use of tobacco or any other product when the price is high. 
Then when the seller finds the amount demanded to fall off 
in consequence of the increased price, we have a cause which 



292 THE LAWS OF SUPPLY AND DEMAND. [III. 65. 

we must trace back to the producer. The consumer buying 
less, the producer finds that he cannot sell the same amount as 
before. He must therefore do one of two things : (1) di- 
minish his production, or (2) lower his price, thus taking a part 
of the tax upon himself. Which course he will take depends 
upon the conditions under which he produces, and especially 
upon whether monopolized elements enter into the production. 

If there is no monopoly, then it is to be assumed that, before 
the taxes were levied, the competition of producers had resulted 
in the tobacco being sold at the lowest price which would 
induce any person to engage in its production. This being 
the case, the producers could not all afford to go on producing 
as before, and still pay a part of the tax. There must there- 
fore be a diminution, those least able to bear the additional 
burden going out of business, and the others diminishing their 
production. This diminution must, in the case supposed, go 
on until the rise in prices caused by the increased scarcity be- 
comes nearly equal to the tax. We have therefore as a second 
law: 

The tax levied upon a commodity into which no monopolized 
elements enter is entirely paid by the consumer. 

65. Suppose next that a monopolized element does enter ; 
for example, that certain soils are much better adapted to rais- 
ing tobacco than to any other purpose, and would command a 
much higher rental than they would if the production of to- 
bacco were stopped. If the cultivators of such soils leave off 
raising tobacco, they will be subject to a greater or less loss of 
income. Therefore rather than do so they will lower the price ; 
that is, they will pay a portion of the tax themselves. To cor- 
respond to the actual case we must suppose a graduated monop- 
oly, some soils having no special advantage in raising tobacco, 
and others having a great advantage. The former will now be 
devoted to the cultivation of some other product when the tax 
is levied, while the owners of the latter will pay a portion of 
the tax. We therefore reach the conclusion : 



III. 67. J . EFFECT OF TAXES ON PRODUCTION. 293 

A tax upon a sensitive commodity into which monopolised 
elements enter is divided between the producer and the con- 
sumer. 

66. A fourth case may be considered possible, namely, that 
in which a consumer will not pay any increase of price whatever. 
Let us then suppose that, from any cause, when the seller of 
tobacco raises the price, he finds that his customers will not 
bivy any at all, and that he must either continue to sell at the 
old price or go out of business. The knowledge of this fact 
will go back through the channels of trade to the producer, 
who must then take his chance of selling at the same price 
as before or giving up production. If he can better afford to 
pay the whole tax than to go into some other business, he will 
do so. If he cannot, he must stop producing tobacco entirely. 
Hence we have a fourth law : 

If a commodity cannot be sold at all above a certain price, 
a tax upon it must be paid entirely by the producer. 

This case can hardly arise unless a commodity is very sensi- 
tive in consequence of some substitute for it being readily ob- 
tainable. Then if this substitute is untaxed, the effect of the 
tax may be to stop the production of the taxed commodity 
entirely. 

6*7. Taxes on International Trade. If an import duty be 
levied, the home and foreign production of the article imported 
will be changed in accordance with laws founded on those 
first principles which have just been enunciated. A much 
greater complexity of circumstances ma} r , however, enter, de- 
pending upon the variety of sources from which both the 
foreign and domestic supply of the commodity may be ob- 
tained. In domestic taxation we had to consider only a single 
class of producers, or at most a single graduation of the monop- 
oly. But most largely imported products may be obtained from 
several countries, where they are produced under very different 
conditions ; we must therefore see how the preceding principles 



294 TEE LAWS OF SUPPLY AND DEMAND. [III. 68. 

will apply to these various conditions which may be found to 
exist. If there were a commodity C which could be produced 
only in England, and which none but Americans consumed, 
then an import duty levied by America upon C would either 
be paid wholly by American consumers, or divided between the 
American consumer and the British producer in exact accord- 
ance with the laws already laid down. That is, the tax on an 
insensitive product, or on a product of which no producer in 
England had any monopoly, would be paid entirely by the 
American consumers. As the product, on the one hand, became 
sensitive, or, on the other hand, as the production was monopo- 
lized, the British producer would have to lower his price in 
order to induce the Americans to continue their importation. 
This simple case is, however, an extreme one. As a matter 
of fact almost every commodity can be and is, to a greater or 
less extent, produced by ourselves. This fact brings in a case 
which cannot arise in domestic taxation, namely, that of an 
untaxed home product competing with the taxed foreign 
product. Hence the laws governing the case will be more 
complex than in the case of domestic taxation. 

68. A yet further difference in the two cases arises from 
the fact that the British producer has other nations to whom 
he can sell, and who perhaps do not levy the same tariff that 
the United States does. To show how these two differences 
modify the result, let us take the case of writing-paper. Sup- 
pose that under free trade a certain amount Q of writing-paper 
would be annually imported from abroad and a certain other 
quantity H produced at home. Let a duty then be levied upon 
the foreign paper. We may suppose that the foreign manufac- 
turer would at first endeavor to throw the payment of the 
entire duty upon the American consumer. The latter would 
then be charged a higher price for his paper. The result would 
be an attempt on his part to economize in the use of paper and 
to prefer the domestic product. The immediate result would 
therefore be an increased demand upon the American manu- 



III. 68.] EFFECT OF TAXES ON PRODUCTION. 295 

facturer for paper. This would lead to a rise in the price of 
the home product. The effect of this upon home production 
would depend upon the extent to which monopolized elements 
enter into the manufacture of paper, the effect being determined 
by the laws already laid down in treating of monopolies. 

If no monopoly either in skill or material existed, so that large 
numbers of men could make paper as advantageously as the 
most experienced makers, then this higher price would stimu- 
late the manufacture of paper. The rise in the price would be 
checked, and the American consumer, getting his supplies at 
home, would greatly diminish his demand for the foreign pro- 
duct. 

We must now trace the reaction of this diminished demand 
upon the foreign producer. If no monopolized elements enter 
into the foreign product, then the foreign producer, making no 
more than the regular profit, could not afford to lower his price 
in order to stimulate the declining demand. If he had no 
demand except what came from America, those who were least 
able would have to go out of business, as in the case of home 
taxation. Just here, however, the difference arises. The Eng- 
lish manufacturer has not only America, but his own country 
and the rest of the world, as possible buyers of his product. 
Hence by lowering the price in a degree very slight compared 
with the duty, he may recover from other sources of demand 
what he has lost id the American demand. He will not there- 
fore be obliged to bear any considerable portion of the tax 
levied by America. This conclusion may be generalized as 
follows : 

If the greater part of the supply of some special commodity 
produced in one country is consumed in another country, then 
a duty levied by the consuming country may have to he partly 
borne by the producer. But in the more common case in which 
there are many home and foreign consumers of the commodity, 
then either a duty levied must be paid entirely by the con- 
sumers of the country which levies the duty, or the importa- 
tion of the commodity must cease. 



296 THE LAWS OF SUPPLY AND DEMAND. [III. 69. 

69. The effect just described upon the foreign producers 
was deduced on the supposition of a non-monopolized home 
production. If, however, the home production is monopolized, 
then the increased home demand consequent upon the duty- 
will not be entirely met by increased home production, but by 
increased home price. The owners of the monopolized ele- 
ments will be able to command a higher price for their services. 
The consumer will therefore have to pay a higher price whether 
he purchase the home or foreign product. For a yet stronger 
reason than before, the foreign producer will have no motive 
for materially diminishing his price. One result will be a 
diminution in the consumption of paper ; another will be an in- 
crease in the ability of the home producer to command a price 
for his monopoly. 

We thus see that an import duty upon products into which 
monopolized elements enter gives an immediate value to those 
elements which they would not otherwise have. Suppose, for 
example, that in consequence of inherent capacity and natural 
aptitude I have acquired a peculiar skill in making a very ele- 
gant style of paper at a very small cost to nn-self. So long as 
I am subject to the competition of equally gifted foreigners I 
may be unable to command more than a moderate price for my 
paper. If, however, I can induce the government to levy an im- 
port duty on this particular kind of paper which I alone in this 
country can make to the best advantage, then I can raise the 
price either to the highest limit which people are willing to pay, 
or to the cost of production by less favored persons. That is, 
by the aid of the tariff I shall be able to command for my 
skill a higher price from my fellow-citizens who want the paper, 
while my government may not be able to collect any increased 
revenue from foreign importations, because the diminution of 
imports may compensate for the increase of duty. 

If, on the other hand, there are an unlimited number of my 
countrymen who are as well qualified to make this peculiar 
paper as I am, then a tariff will not benefit me, since, in any 
case, I am then subject to unlimited competition. 



III. 70.] EFFECT OF TAXES ON INTERNATIONAL TRADE. 297 

lO. Effect of Import Duties on the ^Balance of Trade. 
From the considerations in the last chapter it follows that in- 
ternational trade is determined by production and relative prices 
in the two countries, combined with cost of transportation, 
customs duties, and other expenses incident to the exchange. 
The final conclusion to which we are led will be most clearly 
seen by taking the prices in some one country as a standard of 
comparison. Let us then consider a unit of any commodity 
produced in the United States to mean one dollar's worth, as 
determined by the wholesale price in New York. Suppose, to 
fix the ideas, that in Liverpool these unit quantities of different 
commodities have the values shown in the following table. 
The numbers in the table are supposed to be the quotient of the 
price in Liverpool divided by the price in New York. 

Cotton $1.25 

Wheat 1.20 

Leather 1.15 

Petroleum 1.10 

Beef 1.00 

Cloth 0.95 

Linen '. 0.90 

Iron 0.85 

Silk 0.80 

Tin 0.80 

Wool 0.75 

Suppose that in this state of things transportation cost noth- 
ing and trade were free. Then it is evident that cotton, wheat, 
leather, and petroleum would be exported from New York to 
Liverpool, while cloth and all the articles below it on the list 
would be imported. If the values of these exports balanced 
that of the imports, trade would continue on this basis, though 
prices might be brought more nearly to a level. But suppose 
that our exported articles exceeded in value those imported. 
The result would be an influx of coin to pay for them, and a 
consequent rise of prices in this country. There would then 
be less cotton, less wheat, less leather, etc., in a dollar's worth, 
so that the home prices of these articles would be brought more 



298 THE LAWS OF SUPPLY AND DEMAND. [III. 70. 

nearly to an equality with those abroad. The result would be 
a diminution in the exports of those articles, and an increased 
importation of articles which it did not before pay to import. 
The equilibrium would be reached when a sufficient. supply of 
articles imported from the bottom of the list was taken to bal- 
ance those exported from the top of the list. 

Suppose, secondly, that we consider the cost of transportation. 
This will depend, not upon the value of the product, but upon 
its weight and bulk. It will prevent trade in those commodi- 
ties the prices of which in the two countries do not differ 
by enougli to pay the cost of transportation. 

Let us suppose, next, that an import duty of 50 per cent ad 
valorem, upon all foreign products is levied by each country. 
If the above scale of prices continued to hold, all trade would 
be stopped by this duty. 

Suppose, however, that the duty was levied only by one 
country, say America. If the scale of prices were unchanged, 
there could be no imports to pay for the exports, because the 
duty would raise the price of all foreign products, even that 
of wool, above the home price. Since, however, our cotton, 
wheat, and other commodities are, by hypothesis, admitted free 
in Liverpool, the exports of those commodities would continue, 
and would for the time be paid for in gold. The result of this 
influx of gold would be a general rise of prices in this country 
(§ 21). Let us now trace the effects of this rise. 

When it reached 10 per cent the export of petroleum would 
cease ; at 15 per cent, that of leather ; at 20 per cent, that of 
wheat; at 25 per cent, should it reach that limit, that of cot- 
ton. For we can export nothing unless the foreign exceeds 
the home price, and each of these percentages is the excess of 
the foreign price before the inflow of gold began. 

To see whether this prohibitory limit would be reached, let 
us consider the articles at the bottom of the scale. The for- 
eign price of iron being 85 cents, the duty of 50 per cent would 
raise its cost to us, when imported, to $1.2T|. We should 
therefore import none, even after the rise in prices. The 



III. 71.] EFFECT OF TAXES ON INTERNATIONAL TRADE. 299 

price of foreign silk, with duty added, would be $1.20. Hence, 
when the home scale of prices rose to more than 20 per cent, 
we should begin to import silk, tin, and wool, but should ex- 
port nothing but cotton. The reduced annual imports and 
exports would then balance each other at a rise of between 
20 and 25 per cent in the scale of prices. 

Studying the preceding case, we see that the reason trade 
would continue is that the foreign relative price of the three 
articles at the bottom of the list increased by 50 per cent, the 
amount of the duty, is still less than the relative foreign price 
of cotton at the top of the list. Had the duty been 60 per 
cent, nothing but wool could, have been imported, and TO per 
cent would have stopped all trade. Our conclusions are : 

I. The first and immediate effect of a newly levied ad 
valorem import duty is to raise the scale of prices in the coun- 
try which levies it. 

II. The ultimate effect, after equilibrium is reached, is to 
stop all foreign trade except in those commodities whose rela- 
tive cost of production in the two countries differs by a greater 
percentage than t that of the duty. 

III. The import duty cannot permanently impair the 
equality of values imported and exported, and must there- 
fore diminish the one as much as the other. 

71. The question may arise whether by increasing the duty 
on the articles at the bottom of the list a state of things could 
not be brought about in which the home supply would all be 
made in this country and nothing would be imported. To an- 
swer this question, let us suppose the attempt successful. We 
should then have a continual export of wheat, cotton, and other 
commodities which would have to be paid for. If the duties are 
so high that the exports are not paid for in goods, they would 
have to be paid for in money. Thus would arise a continual in- 
crease in the volume of the currency, accompanied by an increase 
in the price. This increase could never stop until the influx of 
gold was stopped by our exports being paid for in goods. 



300 TEE LA WS OF S UPPL Y AND DEMAND. 

It must be remembered that this increase of price would not 
be confined to imported articles, but would affect the wheat and 
cotton exported. When the price of these articles became as 
high as they were abroad, then their export would necessarily 
cease, and thus we should have an end of all trade. We there- 
fore reach the conclusion, 

By no device of levying duties can we permanently prevent 
the imports and exports from balancing each other. 

EXERCISES. 

1. If a personal tax should be levied on all persons having red hair, could 
those persons charge a higher price for their services in consequence? 
What would be the effect of such a tax ? 

2. In a community where grocers have to purchase a license to carry on 
their business, can they charge a higher price for their goods in consequence ? 
In what manner is the equilibrium restored if disturbed by such a tax ? 

If a tax is levied upon an income derived from patents, can the person 
taxed collect it from others by charging a higher price ? 

3. Show the error of the following reasoning: The monopolist is the very 
person who can best afford to be taxed. For, since lie has a monopoly, 
he can charge what price he pleases for his monopolized products, and can 
therefore collect the entire tax from his customers by raising the price of 
those products. (Cf. § 65.) 

4. Show more explicitly than is done in § 54 that there can be no trade 
between two countries, how great soever the difference of their general pro- 
ducing capacities, if the relative producing capacities are the same for all 
commodities. Put the hypothesis in this shape: Of the various necessaries 
of life- 
Country A produces the quantities M, N, P, Q, etc., per man. 
Country B produces the quantities £ M, \ N, i P, i Q. etc., per man. 

o. Apply the proposition that a tax on production has the same effect 
as an increase of the cost of production to the case of international trade. 
Is there any difference between the economic effects of an import duty 
and an increase in the cost of ocean transportation arising from an increase 
in the price of coal ? 

6. What would be the economic effect of a tax of ten per cent of the 
gate-money at all horse-races ? 

* 7. If so heavy a tax should be levied on the home manufacture of 

* The student will be better able to grapple with the questions marked 
by an asterisk after he has been through the next book, and he should then 
return to them. 



EXERCISES. 301 

paper as to entirely stop its production, while the foreign article was 
admitted free, would there arise any increased demand for other home 
products to compensate for the loss of the paper? 

8. Show under what conditions the following may be true: "We may 
often, by trading with foreigners, obtain their commodities at a smaller 
expense of labor and capital than they cost to the foreigners themselves." 
If you have any difficulty, consider how much of the labor of a hod-carrier 
an eminent lawyer can command by an hour's work. 

9. If the farmers of the United States could raise cotton in unlimited 
quantities at a cost of two cents a pound, what effect would this have 
upon the industry and foreign exchanges of the country? "What would be 
the benefit to the world at large? 

*10. If English operatives should lose their skill, and their capitalists 
cease to manufacture, in what way would our interests be affected? 

11. Are there any American manufactures whose production requires 
monopolized elements, and which under the influence of an import duty 
will be sold abroad cheaper than at home? Show under what conditions 
such a result is possible. Take as an extreme example the following case: 
A farmer discovers a mine of copper on his farm from which he can 
obtain the metal in unlimited quantities at one third the current cost. 
Our import duty is 45 per cent ad valorem. How are the most advan- 
tageous selling prices for the farmer at home and abroad respectively 
determined? 

12. Should it be regarded as a sign of want of skill, or as a sign of 
prosperity, that the imports of a couutry are very large in proportion 
to its population? 

*13. "Within two or three years of the close of the Franco-German "War 
the French paid an indemnity of 5,000,000,000 francs to the Germans, 
having raised the money by loans. Is it to be supposed that there was 
any actual transport of this amount of coin from France to Germany? 
"Whether there was or not, explain what the economic result of the pay- 
ment finally was. 

*14. If five thousand Americans go to Europe for the summer and spend 
abroad, on an average, $1000 each, what is the ultimate effect of this ex- 
penditure? 

15. If "our government could adopt such a policy that we could export as 
small or as great a value as we pleased in payment for a given volume of 
imports, ought it to make the exports large or small in amount? 



302 THE LAWS OF SUPPLY AND DEMAND. [III. 72. 



CHAPTER XII. 

THE CAUSES WHICH DETERMINE THE KATE OF INTEREST. 

72. The question of usury lias been one of the stumbling- 
blocks of mankind in all ages. Except in the most intelligent 
society, and in recent times, the taker of "usury" has been 
generally looked upon as one who unjustly made a profit with- 
out rendering any service in return. The view of the natural 
man may be illustrated as follows : I loan a man $1000. Dur- 
ing the year it remains in his hands I, the owner of the money, 
have nothing to do with it and have no agency in its operations, 
yet at the end of the year I demand and receive back from him 
not only the $1000, but $50 or perhaps $100 or more in the 
way of compensation. Compensation for what? Apparently 
not for anything I have done or been doing. Not for my labor 
in gaining the $1000, because I was compensated for that when 
I got the money ; not for anything I did afterwards, because I 
did nothing afterwards. Thus it looks as if I got my interest 
without rendering any service whatever. The case seems 
strengthened when traced to its every-day consequences. If, 
by my own earnings or by inheritance, I am fortunate enough 
to be the owner of $100,000 or more, I can spend my life 
without performing any labor whatever, and live in comfort, 
and perhaps in affluence, on what society pays me as interest 
without expending any of my original fortune. 

Yet if we look at concrete cases we shall see that this 
difficulty must be surmountable. If the usurer were a person 
who forcibly compelled people to take his money and pay him 
interest for it, then the preceding general conclusion would be 
evidently correct. But, as a matter of fact, he never loans 
money unless some one comes to him for it, and is willing to 
pay the interest demanded. Now, evidently no one will do this 



III. 72.] CAUSES AFFECTING THE RATE OF INTEREST. 303 

unless he expects, by means of the money, to receive not only 
the benefit of the money itself, but of the interest which he ex- 
pects to pay. Of course it is here presumed that the borrower 
knows what he wants and what he is likely to do, and that he 
is not systematically the victim of a delusion which prompts 
him to seek that which is going to do him an injury. As a 
matter of fact, if we look into the case, we shall find that as a 
rule the borrower of money does gain by the bargain. Take 
for example the owner of a fertile pasture-field in California. 
The field is of no use to him unless he can stock it with sheep. 
Unless he can find somebody to supply him with sheep, he 
may have to sell half his field in order to get sheep for 
the other half. Instead of doing this he goes to a capitalist, 
borrows money, perhaps at twelve per cent interest, and buys 
the necessary sheep. At the end of the year he sells his wool 
and receives for it more than he lias expended for pasturage 
and services, and still has his sheep. He pays the capitalist his 
interest, and is still richer than he was when he started. He 
could sell the sheep, and with the proceeds pay off the principal 
and have a profit left. 

"What has gained this profit ? Only his own labor and ex- 
ertions, says the objector. But this is clearly an error, for it is 
certain that if nothing but his own labor and exertions were 
necessary he would not have gone to the capitalist at all. His 
labor would have been worthless without the sheep, and he could 
not get the sheep without money. But granting this, the ob- 
jector asks, What right had the capitalist to charge him interest ? 
The answer is that in the course of the year the man has been 
enabled to make twice as much profit with the capitalist's 
money that he could have made without. Nothing, therefore, 
can be more equitable and just than that the capitalist should 
have his share of what his money helped to produce. Between 
rational people there can be no lending and borrowing unless 
it is expected that the money is going to enable the borrower 
to gain more than its interest, through the advantage it gives 
him. Without this it would be unwise for him to borrow. 



304 TEE LAWS OF SUPPLY AND DEMAND. [III. 73. 

Indeed without this it will be unwise for the capitalist to 
lend, because he may not get his money back again unless 
the borrower has been so successful in the use of it as to be 
able to repay it with interest. Thus the difficulty which we 
have cited is simply a wrong way of looking at things, and 
arises from neglecting or overlooking the principle that every 
agency necessary to production is to be counted as a factor in 
production. The mistake is of the same nature as when we 
look upon a brick house as simply a product of the labor of 
brickmakers, bricklayers, and carpenters, and leave out of ac- 
count the knowledge and skill which were necessary to organize 
and direct their work. 

13. Since there are people always ready to borrow money 
and others ready to supply it, it follows that we may speak of 
supply and demand in borrowing and lending money as we do 
in exchange. Moreover, we can easily see that the rate of in- 
terest is determined, at least for the time being, by the relation 
between demand and supply, just as the price of goods is so de- 
termined. Every increase in the rate of interest tends to dis- 
courage borrowers and thus to diminish demand, for the same 
reason that a rise in prices diminishes the demand for goods. 
It also increases the supply by offering stronger inducements to 
owners of money to save and lend it instead of spending it 
themselves. Thus in each state of the market there will be a 
certain rate of interest at which the supply and demand for 
money to lend and borrow will be equal. When the demand 
exceeds the supply the rate of interest will rise, thus checking 
the demand and stimulating the supply. When demand falls 
off, the rate of interest falls also, thus discouraging the supply 
and encouraging the demand. 

Fluctuations of this sort are seen from week to week and 
month to month in the great money-centres of the world. The 
Bank of England fixes its rate of discount from time to time 
according to the state of the market, to which it therefore 
serves as an index. Ordinarily the rate is three or four per 



III. 74.1 CAUSES AFFECTING TEE RATE OF INTEREST. 305 

cent per annum. But occasionally satisfactory borrowers can- 
not be found without going even below three per cent. Occa- 
sionally the rate rises to six, eight, or ten per cent. In America 
the prevalence of usury laws nominally prevents these fluctua- 
tions ; but the result of this is that when the demand for 
money is so great that the rate of interest necessary to equalize 
demand and supply is above the legal rate, the banks select 
the customers to whom they will lend. The principles upon 
which this is done will be discussed later ; all we have at pres- 
ent to understand is that in each state of the market there is a 
certain definite rate of interest which will equalize demand and 
supply. 

'74. All this does not, however, tell us why in the long-run 
money should have a definite rate of interest. "Why is it, for 
example, that in a certain state of the market the borrowers 
and lenders should be in such proportion that four per cent 
per annum would equalize the two rather than one per cent or 
fifty per cent ? 

To answer this question we have to examine the causes upon 
which the demand and the supply respectively depend, and see 
by what conditions they are equalized. In order that any person 
may be willing to borrow money at a definite rate of interest, 
he must consider that he has at least an average chance of gain- 
ing more than that rate by means of the money. At this point 
a source of confusion is to be noted and avoided. "What the 
borrower really pays interest for is capital, not money. The 
borrower can gain nothing by keeping the money ; all he bor- 
rows it for is to purchase some kind of capital. True, it is 
morally and physically possible that he might expend the money 
in his own support. But a man who would do this would 
never be able to borrow at all. As a matter of fact, it is always 
necessary that the lender should have full assurance that the 
borrower will be able to pay, and he therefore requires that the 
borrower shall place a full equivalent of capital, with a margin 
to guard against loss, in possession of the lender or of some 

20 



306 THE LAWS OF SUPPLY AND DEMAND. [III. 74. 

trustee. Such a legal conveyance of tlie ownership of capital to 
guard a lender against loss is a mortgage. 

We see then that what is called the rate of interest on money 
is not a property of the money itself, but depends upon the ad- 
vantage which capital gives its owner in production. We have 
then to see in what this advantage consists. In the first place, it 
has been pointed out that capital is a labor-saving agent (II. 29). 
Its fundamental property is that, with the aid of labor, it returns 
its user at some future time a value greater than that of the capi- 
tal and labor combined. For example, if by expending $100 in 
any kind of capital to-day, the manufacturer finds that he can 
add $10 per year to the net value of his product, after paying 
for the additional labor, and deducting all the cost of keeping up 
his capital to its original value of $100, then that capital yields 
him a profit of ten per cent per annum. If the increase of pro- 
duction does not exceed the cost of keeping up the capital, then 
he would make no greater profit with the capital than without 
it, and so there would be no use in his acquiring capital at all. 

It has already been shown that nature may be said to keep a 
number of standing offers of interest upon capital open to the 
world (II. 29). These offers take the form of opportunities for 
digging canals, building railways and tunnelling mountains, and, 
in general, of developing the resources of the country. The 
rate of profit offered depends upon how far the country 
is already developed. In an absolutely new country, such as 
America was three centuries ago, we can hardly set any limit 
to the rate of interest offered by nature. This is the same 
thing as saying that capital was very much needed, or that 
there was great room for improvement in the facilities for pro- 
duction. At the present time it is not always possible to know 
with certainty in advance what rate of interest nature does 
offer for building a particular railway or factory. But men 
engaged in the management of capital make the best estimate 
they can of the profit to be gained in each case, and select their 
field of investment accordingly. 

Next consider the case of circulating capital. A manufacturer 



III. 75.] CAUSES AFFECTING TEE BATE OF INTEREST. 307 

finds that with the machinery he already possesses and the la- 
borers he already employs he can make more goods than he does. 
But to do this he must increase his stock of raw materials. If 
he has not the means of doing this, he must borrow money 
in order to purchase the necessary materials. In order that he 
may gain a profit exceeding the interest which he pays, he 
must be able to sell his increased product at an advance over 
the increased cost of material and labor. "Were the state of 
things such that neither he nor any other manufacturer could 
do this, there would be no profit in increasing the quantity of 
goods manufactured, and the work would remain stationary. 
Hence, although circulating capital is not a labor-saving agent, 
it is yet a requisite of production whose accumulation requires 
abstinence from its immediate enjoyment on the part of the 
owner. 

75. Next let us see in what way this demand acts upon 
the supply. The first question is, Why is the supply of money 
to lend limited at all ? The reason is that the amount of every 
man's income which he is able and willing to save from current 
expenditures is limited, and this is all he can have to lend. A 
large fraction, probably a large majority, of the population do 
not expect permanently to save anything for use as capital. It 
is to the few whose incomes are so large or whose personal 
wants are so few that they are willing to save that borrowers 
must look for capital. Now, unless some interest is to be 
gained as the result of saving, there is no strong motive for any- 
body to save more than is necessary for the support of himself 
and his family, and for insurance against want in his old age. 

To see this by an example, suppose that you have gained one 
hundred dollars. Yon have your choice to expend it in some- 
thing for present enjoyment, or to postpone the expenditure to 
some future time, say the end of the year. Perhaps you intend 
to buy a cyclopaedia, and the question is whether you shall buy 
it now or at the end of the year. Other conditions being equal, 
the advantage is in favor of buying it now, because then you 



308 THE LAWS OF SUPPLY AND DEMAND. [III. 76. 

will have the enjoyment of it during the year, while if you 
postpone the purchase, you not only lose this enjoyment, but 
you may die in the mean time and thus lose all opportunity of 
any enjoyment of your money. If then a manufacturer comes 
to you and wants to borrow the money, it is evident that you 
and he cannot both have the benefit of what the money may 
purchase during the year coming. You will therefore refuse 
him unless he pays you what you consider a sufficient compen- 
sation for going one year without the use of the cyclopaedia. 

Yiewing the same case from a different standpoint, let 
us suppose that you do not under any circumstances want the 
cyclopaedia until the end of the year, — perhaps indeed it is not 
to be published until after that interval, — and that you have not 
yet earned the money to buy it. The question then takes the 
form, Shall you earn the money necessary to purchase it now, or 
shall you wait until you want it? Unless you are so fortunate 
that you can earn a hundred dollars without any disagreeable 
labor, your wisest course is to wait. It will at worst cost you 
no more to earn the money a year hence than it will now, and, 
since the future is always uncertain, it is best not to expend 
labor for what after all may fail to yield fruition. And so for 
this reason also you have no sound motive for earning the 
money in advance, unless you are to make a future profit by 
doing so. Thus, as a general rule, there will be no money to 
loan unless interest is to be gained. 

76. The minimum below which the rate of interest can 
never fall is that which just suffices to induce the savers of 
income to earn an income in advance of their enjoyment of 
it. What rate this is is a fact of human nature which can be 
learned, not by reasoning, but only by observation. Human 
nature differs so widely with different men that not even the 
law of averages can be satisfactorily applied, except in a single 
place and at a given time. Some men are in receipt of great 
incomes without any more exertion than is really necessary to 
their en joyment of life. To such men it is all the same whether 



III. 76.] CAUSES AFFECTING THE RATE OF INTEREST. 309 

they earn money now or next year, and they might be willing 
to part with it without receiving any interest at all. In the 
case of other men a certain instinct of what is right leads them 
to live frugally and thus to expend less than their income. 
Such men will be willing to loan at a very low rate of inter- 
est. These cases are, however, exceptional, and the rule is that 
men save only in consequence of the interest they are to gain. 
The numerical value of the minimum rate of interest is a 
result of certain qualities of human nature which we cannot 
measure with certainty. It is, however, a curious fact that up 
to the present stage of human history the rate of interest has 
rarely fallen below that which would yield a young man, in 
the course of his average life, a profit equal to the principal in- 
vested. The expectation of life for a man at twenty may be 
put at forty years. If he has gained a certain capital it will, 
without any investment, last him his average life, if he con- 
sumes two and a half per cent of it per annum. Hence, so far 
as he is individually concerned, he has no motive for saving 
unless he can gain this rate of interest. Now this is about 
the minimum rate yet known. Of course no perfectly exact 
numerical statement can be made in such a case, because the rate 
is always fluctuating ; but this is a sufficient approximation for 
our purpose. Since, then, as human nature is constituted, the 
supply of capital tends to diminish as the rate of interest falls, it 
follows that all persons who want capital must pay interest. 
Nature is competing with them, and they must at least pay her 
price. But the rate they have to pay may be very small. As 
a country increases in wealth, the rate of interest tends to fall, 
both from diminished demand and increased supply. Nature 
continually offers less and less, as the resources of a country are 
developed, and the accumulation of raw material and the de- 
velopment of factories constantly approach the limit at which 
no further profit can be made by the further increase of capi- 
tal. Again, as wealth increases men are more and more able 
to save, and thus the supply increases. 



310 TEE LAWS OF SUPPLY AND DEMAND. [III. 77. 

YT 1 . Risk as affecting the Hate of Interest. In the pre- 
ceding discussion we have taken no account of the risk which 
a lender incurs of wholly or partially losing the money he lias 
loaned, in consequence of inability on the part of the borrower 
to repay him. For this risk he must be compensated ; and of 
course the amount of the compensation will be greater the 
greater the risk. Since he is himself the sole judge of the 
risk and the compensation, no sure mathematical law can be 
laid down to govern the case. The mathematical theory of 
probabilities, however, embodies a principle which is applicable 
to a certain class of cases, if the lender reaches his conclusions 
in the most reasonable manner. This principle is that the com- 
pensation for a risk is equal to the amount in jeopardy mul- 
tiplied by the probability of loss. Suppose, for example, that 
from the best judgment which a lender can form there is one 
chance out of twenty that the borrower with whom he is deal- 
ing will fail within a year. We then say that the probability 
of failure within the year is one twentieth, and the proper com- 
pensation for the risk would be five per cent per annum. If 
the minimum rate of interest were also five per cent, then the 
lender should receive ten per cent per annum for his money. 

We ought perhaps to say that this is the minimum which he 
as a prudent man ought to accept. If his situation is such 
that the loss of the money would reduce him to distress, he 
ought to demand a higher compensation on account of the risk. 
The wealthier he is the nearer this reasonable compensation 
will approach the mathematical limit. It can never fall below 
that limit. 

78. The Nature of Capital and Cause of Interest. The 
reader who has carefully mastered the subject of capital and 
interest will see that they depend fundamentally upon the fact 
that time, and perhaps a long time, must elapse between the 
performance of labor and the enjoyment of its products if 
we would get the maximum of ultimate enjoyment from our 
labor. For example : 

If I sow a crop, I must wait a year for its final enjoyment. 



III. 78.] CAUSES AFFECTING TEE RATE OF INTEREST. 311 

If I raise a liorse, lie will not be of any use for three or 
four years, and I may not get all the use of him for ten or 
fifteen years. 

If I build a railway, I may not be fully compensated for 
my labor until after the lapse of twenty or thirty years. 

Now, as I am situated in civilized society, I have my choice 
either to enjoy all my labor shortly after the time of perform- 
ing it, or to postpone my enjoyment for one or many years. 

The longer I am willing to postpone my enjoyment the more 
thorough and effective I can make the agencies by which my 
future wealth is to be produced, and hence the greater the 
amount of ultimate enjoyment which I or my posterity can 
command from my labor. 

But my wants are immediate. I cannot live now on next 
year's crop, nor haul my crop to market with a new-born colt. 
I must be fed, clad, and housed while working for my future 
self. 

He who loans me money is one who enables me to devote 
my labor to my future good by feeding, clothing, and housing 
me now, and hence enables me to produce more wealth in the 
long-run. If he does not require repayment of the money 
until I have begun to gain the increased means of enjoyment, 
it is just that I share the increase with him when I do pay it. 
Interest is the excess which I pay him on account of his per- 
mitting me to anticipate the future results of my labor by en- 
joying now what otherwise I would only have enjoyed in the 
future, or perhaps would never have enjoyed. 

When I devote myself to labor intended to yield sustenance 
only in the distant future, I' do not engage in the direct pro- 
duct of the sustenance, but in the production of some inter- 
mediate form of wealth intended to increase the productiveness 
of my future labor. This intermediate form of wealth we call 
capital. 



312 THE LAWS OF SUPPLY AND DEMAND. [III. 78. 



EXERCISES. 

1. Bastiat illustrates interest b} r supposing one carpenter, James, with 
ten days' labor, to make a plane which he loans to William. The latter 
uses it for 290 of the 300 working days of the year, when it is worn 
out. He spends the remaining 10 days of the year in making a new plane 
to return to James, but, in addition, he gives him a plank as interest. 
Mr. Henry George says William lost the value of this plank by his bargain, 
because he could have spent the first 10 days of the year in making him- 
self a plane, instead of the last 10 days, and would then have saved his 
plank. Show the fallacy. 

2. Explain why the rate of interest is highest in newly-settled countries. 
Especially what causes affected the rate of interest in California immediately 
after the gold discoveries ? 

3. Show the effects of discovering improved methods of production 
upon the rate of interest, and explain how the effect depends upon the cost- 
liness of the machinery needed to put the improvements into operation. 

4. What effect has a low current rate of interest upon the price of gov- 
ernment bonds bearing interest at a fixed rate ? 

5. Explain how it is that usury laws do not generally make the rate of 
interest lower, but rather tend to prevent men from lending their money. 
Take the following example of their spirit: A man in pecuniary difficulties 
goes to a capitalist saying, "Could I only borrow a thousand dollars for a 
year, I could come out with a handsome profit. But if I cannot get this 
loan, I shall be ruined and my family will be destitute. If the capitalist 
saves the man by loaning him the money at 12 per cent interest and com- 
pensation for risk, the usury laws punish him by perhaps forfeiting the 
entire sum loaned. If he replies to the man, "No, I will not help you on 
any terms whatever, and if your family starves it is none of my concern," 
the law does not censure him. 

6. Explain the relation of interest to the increased productivity of labor 
due to the use of capital. 

7. How does carelessnsss on the part of a community respecting its future 
needs affect the rate of interest? 



BOOK IV. 

THE 
SOCIETARY CIRCULATION. 



IV. 1.] TEE MONETARY FLOW. 315 



BOOK IV.— THE SOCIETARY CIRCULATION. 



CHAPTER I. 

THE MONETAKY FLOW. 



1. "We have now to present the reader with a method of 
representing the exchanges within a social organism considered 
in their totality. The object of the method is to facilitate the 
study of the action of economic causes upon production and 
exchange. 

There is no act of exchange the effects of which terminate 
with the act itself. "When the ownership of any commodity 
passes from A to B, that passage may only pave the way for 
another transfer from B to C, and so on until the commodity 
reaches the person who is finally to consume it. A piece of 
money changes hands without end, since every person who 
receives it expects, unless in exceptional cases, to pay it out 
again to some one else. 

We call to mind that under our present system every ex- 
change is a double transfer of ownership — money passing in 
one direction, and the ownership or enjoyment of wealth in 
the other direction. We thus have two separate processes of 
transfer, one of money and the other of wealth or its enjoy- 
ment. We shall consider these two systems separately, and 
afterwards show the relation between them. The transfer of 
money is the most simple in its conception, and we shall there- 
fore begin with it. 



316 THE SOCIETARY CIRCULATION. [IV. 3. 

2. The Dual Conception of Economic Quantities. We 
now have to draw a distinction between two measures or 
conceptions of economic quantities the neglect of which has 
been a potent cause of dispute between schools, and inexact- 
ness of thought. This distinction is that between a fund, 
or accumulated quantity, and a flow. Applied to a material 
substance like water, this would be expressed as the distinc- 
tion between a reservoir of water and a flow of water. We 
have a conception of a certain number of gallons of water 
stored up in a mill-pond. We also have a conception of a 
rate of flow into the pond, or out of it, of so many gallons per 
hour. Now, there is no fixed relation between these two con- 
ceptions. A very large mill-pond may have a very small flow 
of water from it, and a small pond may have a much larger 
flow. If we were told that one pond had a much larger sup- 
ply of water than another, this statement would be ambigu- 
ous, and we could make no use of it until we knew whether 
" larger supply" meant a larger sum total of water or a larger 
flow per hour. To avoid ambiguity we define fund and flow 
as follows : 

A fund is quantity or value pure and simple : so many 
dollars, for example. 

A flow is so many dollars per hour, day, or year. 

3. To form a conception of the total exchanges of a coun- 
try or other social organism, we must first conceive of all the 
individuals who can make exchanges. This class includes 
all legal persons who can be owners of property. A firm 
or company of any kind must be considered as a person dis- 
tinct from the men who form it. For example, if Brown and 
Smith are in partnership, there will be three persons among 
them, the firm and its two partners. But unless the combi- 
nation forms a separate legal person, having dealings with all 
its members individually, it is not to be considered as a person. 
On the other hand, we are not to count as separate persons 
those who do not do business on their own account. As a 



IV. 4.] THE MONETARY FLOW. 317 

general rule, husband, wife and minor children will all together 
constitute but a single person. In fact, any body of people 
whose separate interests do not concern society may be consid- 
ered as a single economic person whenever we want to con- 
sider their relations to the rest of society. 

In the following chapters we shall graphically represent eco- 
nomic persons by small circles. 

4. Flow of the Currency. In this chapter we use the 
word, "money" in its widest sense, so as to include every- 
thing of which the ownership is transferred from hand to 
hand in payment for goods or services. Let us consider all 
the money paid by any one person. To do this we record 
every payment that he makes, and write down its amount in 
a column of an account-book. At the end of some unit 
of time, say a year, we add up all these payments. "We 
shall then have a definite sum, expressing all the payments 
of that particular person during the year. Let us imagine 
this sum calculated in the same way for every one of the thou- 
sands or millions of persons who make up the social organism. 
The sum total will express the amount of the entire payments 
within the organism during the year. This sum we call the 
flow of the currency. 

Instead of considering payments, we might have taken the 
receipts of money. Under every person's name we should 
then write down all the sums of money paid to him. The 
sum at the end of the year would express the total annual 
payments to him, and this sum for the whole community 
would give another value for the flow of the currency. If we 
determined the flow by both methods, then, since every pay- 
ment made by any one person must be made to some other 
person, we should register every payment twice, once under the 
payer and once under the payee. Hence we should get the 
same sum total of the flow in either case. 

This, however, presupposes that we include no payments 
made to or from foreign persons, or persons outside the or- 



318 



THE SOVIET ART CIRCULATION. 



[IV. 4. 



ganism under consideration. Such payments form a very im- 
portant economic factor ; but in this preliminary discussion we 
have to omit them, and consider only internal payments. We 
may, if we choose, consider all the persons in the world as 
forming a single social organism, and the two measures of the 
now will then always balance. 




Fig. 1. 



The conception of the flow of the currency is represented 
graphically in the following way : We draw a little circle for 
each person legally capable of being an owner of wealth. 
Whenever a payment of money is made we suppose it to pass 
from the circle representing the payer to that representing the 
payee through a little vein. This vein we represent by a line 
from one circle to the other, with an arrow-head showing the 



IV. 4.] TEE MONETARY FLOW. 319 

direction of the payment. These veins form a network through 
which we suppose the money to be flowing from person to 
person. This continual flow of money from owner to owner 
is called the monetary circulation. 

It will readily be seen that when we speak of a flow we 
introduce a conception which does not strictly conform to the 
actual case, because at no time is money really flowing like a 
fluid from person to person. Excepting such cases as that of 
transmission by mail, money is always in possession of some 
one person, and it passes from one person to another in -a 
moment by the act of payment. It would therefore be more 
exact to consider the circles as representing reservoirs of 
money, and the motion along the arrows to take place by sud- 
den transfers from one reservoir to another. But the trans- 
fers have the same result as a flow, and a certain advantage 
is gained by conceiving of the money as regularly flowing 
from one reservoir to the other, as shown by the arrows. In 
fact, the familiar words " currency" and " circulation" in Eng- 
lish, and the yet more expressive phrase "argent liquide" 
applied by the French to ready cash, or money all ready to 
flow, show how natural the conception of a flow of money is. 

We may imagine that on each connecting vein we write 
down the amount of all the money which has passed along 
that vein in the course of the year. The sum total of all the 
amounts passing from any one person will be his total payments, 
and the sum of all the amounts passing to him will be his total 
receipts. The sum of all the numbers written down upon the 
veins will be the total flow of the currency. The amount of 
this flow in dollars we represent by the symbol F. 

The general rule will be that as much money flows from 
every person as flows to him. It is true that there is no law 
against a man collecting as much money as he chooses, just as 
he would collect books or pictures. Practically, however, he 
has no motive to collect any considerable sum of money, be- 
cause he loses interest on it as long as he keeps it. Hence, 
as a matter of fact, nearly all the money received by persons 



320 THE SOCIETART CIRCULATION. [IV. 5. 

is very soon paid out again for some purpose. To this rule, 
however, there are two important exceptions, that of banks 
and that of the government. We have shown that banks 
can create money in the form of credit. The stream of money 
may therefore flow from them for a considerable period with- 
out any stream flowing back. When the credits are paid off by 
their debtors, they are in receipt of money which they are under 
no legal obligation to pay out again. Still we shall generally 
find that in the long-run the receipts and payments will near- 
ly balance in the case of banks as in other cases. In the case 
of a government, payments can be made only in accordance 
with certain legal forms, and there can be no assurance that 
they shall exactly balance the revenue. Hence large sums of 
money may be collected in the public treasury at one time, to 
be paid out at another time. But if, instead of taking a single 
year, we take a generation, the account of receipts and pay- 
ments will still be nearly balanced. 

We are therefore to conceive that the inflow to every person is 
equal to the outflow from him. But it does not follow that 
the number of streams to and from him must be equal. If his 
sole source of income is a salary, there will be but one flow of 
money to him, namely, that coming from his employer. But 
from him there will be currents to his grocer, his baker, his 
landlord, his tailor, and dozens of others from whom he buys. 
A retail tradesman may have streams flowing to him from hun- 
dreds or even thousands of customers, while the streams from 
him may be no more numerous than in the case of his salaried 
clerk. 

5. Distinction and Relation between the Volume and the 
Flow of the Currency. We have to make in currency the dis- 
tinction between a fund and a flow, the logical nature of which 
has been already pointed out. The volume of the currency is a 
fund. On our diagram the volume is the total number of dol- 
lars flowing through the network at any moment. If we in- 
troduce the more accurate conception of each person as a reser- 



IV. 5.] TEE MONETARY FLOW. 321 

voir, then, since the reservoirs contain all the money at any 
one moment, we should say that the volume of the currency 
was the sum total contained in all the reservoirs at any epoch, 
say on midnight of a particular day. 

The method of determining this volume has already been 
laid down (II. 96-98). For our present purpose we may con- 
sider it as made up of two parts, material money and immate- 
rial money. The material portion consists of coin, bank-notes, 
and other forms of credit which pass from hand to hand without 
change or subdivision. The immaterial portion of the currency 
consists of bank credits, the ownership of which is transferred by 
cheques. The relations between the volume and the flow of 
these two kinds of currency have to be considered separately. 

Let us on January 1st fix our attention on a dollar bill. We 
shall perhaps see this bill pass from a young man to a confec- 
tioner in exchange for ice-cream ; from the confectioner it passes 
to the grocer, from the grocer to his drayman, and so on. "We 
may imagine it passing from hand to hand until December 
31st. If we count up the number of times the bill has changed 
hands, we shall have the contribution to the flow of the cur- 
rency made by that particular bill. Adding up the contribu- 
tions for all the dollar bills in circulation, we shall have the sum 
total of their contributions to the flow F. In the case of the five- 
dollar bills we proceed in the same way, but multiply the num- 
ber of transfers by 5. The product will be their contribution 
to F. Doing the same thing for the ten-, twenty-, and fifty- 
dollars bills, and for all the gold and silver pieces in circulation, 
we shall have that portion of F due to the circulation of ma- 
terial money. Let us call this sum total F'. If we divide ~F' 
by the sum total of all the bills and pieces of coin in circula- 
tion, we shall have the average number of times which mate- 
rial money changes hands in the course of the year. Divid- 
ing the 365 days of the year by this number, we shall have 
the average number of days which money remains in one man's 
hands. 

It follows that if nothing but a fixed number of pieces of 

21 



322 THE SOCIETART CIRCULATION. [IV. 5. 

material money were in circulation in a community, we could 
obtain the annual flow of the currency in a third way, as follows : 

Multiply the denomination of every piece of money by the 
number of times it changes hands in a year. We shall then 
have as many products as . there are pieces of money. The 
sum of all these products will be the flow of the currency. 

Let us see now how this conception is to be modified in the 
case of bank credits. As already shown, these credits are not 
material money, but consist simply in rights to money, which 
are represented by writing certain figures in the books of the 
bank. Yet they form a part of the volume of the currency. 
But we cannot separate them into individual dollars so clearly 
as we can the bank-notes. The results, however, do not offer 
any immediate difficulty. Every bank cheque drawn by A in 
favor of B is a contribution to the flow F ; if B passes this 
cheque to C in payment of a debt, the cheque is again added to 
the flow. Moreover, it is only so far as the bank credit is thus 
transferred by means of cheques that it has anything to do with 
the flow. If then we call the sum total of payments by cheque 
F", we shall have 

Total flow of the currency = F = F' -f F". 

If we call the average volume of bank credits or deposits 
D, then dividing F" by D, we shall have the average number of 
times which a dollar of bank credit changes hands in the course 
of the year, and hence we can determine the average length of 
time which it remains in any one person's hands. 

"We have now two quantitative conceptions before us : a sum 
total of payments, F, and the total volume of currency, which 
we shall call Y, by which these payments are made. It may 
perhaps give precision to these conceptions if we compare them 
with that of the circulation of blood in the body. The body of 
an adult man contains a certain number of pints of blood. If 
we keep an account of all the blood which flows into any one 
organ or part of the body, the forefinger for example, in the 
course of one day, we shall have the circulation of that finger. 
Since the same blood may flow in over and over again, and must 



IV. 5.] TUB MONETARY FLOW. 323 

be counted every time, the circulation, even for the forefinger, 
may be expressed by a greater sum total than the entire volume 
of blood in the body. Moreover, this circulation C will be 
greater the greater the time we take, being sixty times as great 
for one hour as for one minute, and twenty-four times as great 
for a day as for an hour. If we add up C for every organ in 
the body, we shall have the total flow of blood for one day. 
Dividing this total flow by the entire volume of the blood, we 
shall have the average number of times which the blood circu- 
lates in the course of the day. 

This analogy must not, however, be carried too far. Blood 
circulates by being always carried back to one central point, 
whereas money is not so carried, but may only pass from hand 
to hand without end. If we wish the analogy to correspond 
more exactly, we must suppose that to the circulation of a single 
molecule of blood from the heart to any organ and back again 
corresponds the passage of a unit of money from one person to 
another. 

Let us now state the algebraic relation between the volume 
of currency Y and the flow F. This relation is expressed by 
saying that F is equal to Y multiplied by the average number 
of times which each unit of money changes hands in the course 
of a year. We may use the algebraic notation : 

B/, the average number of times a material dollar changes 
hands in a year ; 

B/', the average number of times for a bank credit ; 

R, the same average for the whole volume of currency. If 
this number E,, which we call rapidity of circulation, is fixed 
— that is, if money always circulates with the same average 
rapidity — then the relation between F and Y is fixed and defi- 
nite, and one cannot be increased without increasing the other 
also. We therefore have between the volume, flow, and rapid- 
ity of circulation the equation 

F = YXE, 

which is the fundamental equation required. 



324 THE 80CIETABY CIRCULATION. [IV. 6. 

6. We now have to consider whether there is any law which 
fixes the number of times R that each dollar can change hands 
in a year, or, what amounts to the same thing, whether there 
is any law which determines how long a dollar shall remain 
on the average in any one man's hands. A little consideration 
will show us that although this last period is not fixed by any 
precise law, being subject to changes through the action of 
various causes, yet it can only change between very narrow 
limits. 

If every man could pay out his money the instant he got it, 
the time between two payments would be very short. But 
as a matter of fact he must in general keep more or less of 
his money a certain period before he can advantageously spend 
it. If he receives a salary payable at the end of every month, 
he probably pays a moderate grocery bill at once, and keeps 
the rest of his money to spend from time to time uniformly 
throughout the month. If he owes one half, but pays out the 
other half at a uniform rate, then the average time which his 
money stays in his hands is a quarter of the month. In a com- 
munity of such men, such pieces of money would change 
hands forty-eight times in the course of a year. The change 
of hands is made with greater rapidity the higher we go in 
the financial scale. As a general rule every man feels that 
he is losing possible interest on his money by keeping it, and 
therefore tries to pay it out for something as soon as he ad- 
vantageously can. The larger and wider the transactions in 
which he is engaged the better he can manage this, and there- 
' fore the quicker he can pass his money. It would probably 
be found that among the brokers on Wall Street every dollar 
changes hands at least once, and possibly a number of times, in 
the course of a day. 

It might seem at first sight that the causes which determine 
how long a single dollar will remain in one man's hands must 
be so exceedingly transitory and variable that no average time 
can be fixed. This conclusion would be correct if we were re- 
quired to consider the time sought as an absolutely fixed math- 



IV. 6.] TEE MONETARY FLOW. 325 

ematical quantity. But although the quantity cannot be thus 
absolutely fixed, the conditions of society are such that the law 
of averages prevails with a near approach to rigor. The aver- 
age length of time which a dollar remains in one man's hands 
is fairly definite when we take the average of millions of peo- 
ple, each using hundreds of dollars. At the same time it is 
liable to change by the action of any cause, however slight, 
which affects the transactions of the whole community in the 
same way. There are, as we shall presently show, certain 
causes which accelerate the passage of money from hand to 
hand, and there are certain conditions under which this passage 
is retarded and money is kept longer in people's hands. 

ILLUSTRATION AND QUESTION. 

1. An example of confusion between the ideas of a fund and a flow is 
found in the discussion of one of the most celebrated economical theories of 
modern times, that of the " wage- fund." This theory asserted that the sum 
total of money in a country available for the payment of wages was limited 
and definite in amount, a statement in itself quite correct. Hence it was 
concluded that wages could be increased only by increasing this amount. 
I,t was thus supposed that there was a certain relation by virtue of which the 
amount of wages depended upon the amount of the wage-fund. But a very 
little consideration will show us that no such relation could exist, any more 
than the flow of water over a dam could be determined by the amount of 
water in the mill-pond. No matter how vast the fund, it would in time be all 
absorbed in the payment of wages ; then, were the fund never replenished, 
no more wages could be paid, and society would come to an end. The fund 
must therefore be continually replenished. Now, this being so, the pay- 
ment of the wages depends, not upon the magnitude of the fund, but upon 
the rate at which it is replenished. This rate is not a fund at all, but a 
flow. It bears the same relation to a fund that a flow of so many gallons 
per hour does to a reservoir holding so many gallons of water. 

2. Adding up all the bank cheques drawn in a community during a 
month, it is found that they amount to twenty millions of dollars. If each 
cheque were paid by the drawee to a third person, who collected it, what 
would be the total contribution made by these cheques to the monetary 
flow? If the bank deposits averaged five millions of dollars, what would 
be the annual rapidity of circulation for the bank credits? Note that we 
do not count the deposit of money in a bank as part of the monetary flow. 



326 THE SOCIETABY CIRCULATION. [IV. 7. 

CHAPTEE II. 

THE EQUATION' OF SOCIETAKY CIRCULATION. 

7. In the preceding chapter we considered the total pay- 
ments of money from person to person in a social organism. 
Now, considering only the cases which come under economic 
principles, each of these payments was made in exchange for 
something transferred from the payee to the payer. This 
something may be either material wealth already in the posses- 
sion of the payee, or it may be a service involving labor on the 
part of the payee. "When one hires a laborer to work for him, 
he receives in return a service consisting of the results of the 
man's labor. If he buys a pound of tea at his grocer's, he re- 
ceives the tea in exchange for his money. Hence, as already 
remarked, to every flow of currency from one person to 
another corresponds a reverse flow of wealth or services from 
the second person to the first. The total circulation consists, 
therefore, of two combined circulations equal and opposite 
to each other, the one of some form of current money, the 
other of some object of desire, the product of human labor. 
To distinguish these two we shall call the latter the industrial 
circulation. 

The same diagram which represents the monetary circulation 
may also be considered to represent the industrial circulation, 
the latter flowing in the opposite direction from that of the 
arrows, but along the same veins. 

We shall use the term societary circulation to designate 
these two opposite circulations. 

We have shown that it is the industrial circulation alone 
which really supplies the wants of the community. Were it 
possible to keep up the industrial circulation without the use 
of money, men's wants would be supplied just as they are 
(II. 53). 



IV. 8. J THE EQUATION OF SOCIETARY CIRCULATION. 327 

Since we cannot possibly keep up the industrial circulation 
without the other, it might seem idle to point out this fact, but 
the understanding of the fact is conducive to sound thinking 
on the subject. The public are prone to assume that the sup- 
ply of their wants depends altogether on keeping up the mone- 
tary circulation, regardless of the industrial circulation, and 
bad policies are therefore urged upon governments. The 
lesson to be drawn from the fact is this : The influence of 
changes in the monetary circulation tipon the well-heing of 
the community is to he determined by their effects upon the 
industrial circulation. 

8. Our first proposition concerning the industrial circula- 
tion defines its amount. If we include in this circulation every 
transfer of commodities or services for which money is paid, 
or to be paid, and no others, then its value will necessarily be 
equal to the flow of the currency, this flow having been defined 
as the sum total of money payments. But to preserve the 
equality we must exclude from the monetary flow all such 
transfers as loaning money, or depositing it in a bank, because 
these are not balanced by reverse transfers of wealth or ser- 
vices. Then, keeping the two flows in correspondence with 
each other, the flow of the currency must, in the long run, 
remain equal to the total value of the industrial circulation as 
measured in money. 

Of course this measure is subject to the general laws of 
measurement already developed, according to which the numeri- 
cal value of any fixed quantity varies inversely as the measur- 
ing unit. Hence, with every change in the absolute value, or 
" purchasing power," of the dollar, there will, all other condi- 
tions being equal, be an- inverse change in the money measure 
of a fixed industrial circulation. This measure will therefore 
vary directly as the scale of prices. Hence, in accordance 
with the mathematical principle already illustrated, the money 
value of a fixed industrial circulation will be equal to some 
quantity multiplied into the scale of prices. The quantity 



328 THE SOCIETARY CIRCULATION. [IV. 9. 

to be multiplied is simply the value of the industrial circula- 
tion as it would be on the scale of prices which we assume as 
the unit of comparison. Thus in III. 11 we assumed the scale 
of prices in the year 1880 as the unit, and found certain other 
scales for other years. If then we put K for the industrial 
circulation on the scale of prices which we take as unity, and 
if we put P for the actual scale as found from the table of 
prices, then the money value of the total industrial circulation 
will be K X P. 

Prom what has already been said, this product is the same as 
the flow of the currency ; hence, using the notation already 
given, in which that flow is Y X R, we have the equation 

Y X R = K X P, 
which may be called the equation of societary circulation. 

This equation may be regarded as the fundamental one in 
the theory of exchanges. To the non-mathematical reader a 
further explanation of its significance may be needful. The 
first member, TxE, assumes the very obvious fact that the 
total money value of the exchanges which will be effected in 
a year by a number Y of dollars is equal to Y multiplied by 
the average number of times which a dollar changes hands 
during the year. The other member of the equation, K X P, 
implies that the total money value of the wealth and services 
which these payments balance increases with the scale of 
prices, and with the quantities of wealth exchanged ; so that 
when either of these factors increases, Y XE must increase 
in the same proportion. 

9. The next proposition is that the quantity K, which rep- 
resents the industrial circulation as measured by the unit scale 
of prices, also represents, with some slight modifications, the 
sum total of the necessary operations of the social organism, so 
far as these operations consist in the transfer of goods and the 
rendering of services. To show how this is, and what it means, 
let us take some continuous series of those operations. Our old 
history of the coat will serve for this purpose. We wish to 



IV. 9.] THE EQUATION OF SOCIETARY CIRCULATION. 329 

learn what flow of the currency was caused by the various pro- 
cesses of transportation and manufacture to which it was sub- 
ject. Commencing with the sheep on the prairie, the first 
industrial operation was that of tending and shearing the sheep. 
The measure of this industrial operation was the money paid 
by the owner of the sheep to his employes for their work, 
which money payment counts as a part of the flow of the cur- 
rency. The next industrial operation we may conceive to have 
been the transportation of the wool to Chicago by rail. This 
was balanced by a flow of the currency from the sheep-owner 
to the railway company. Arriving in Chicago, the ownership 
of the wool passed to the wool-merchant, and was balanced by 
a flow of the currency from the wool-merchant to the owner. 
By a succession of such operations the wool reached a factory, 
and each operation was balanced by a flow of currency. In 
the factory operatives rendered service in manufacturing the 
wool into cloth, which service was balanced by a flow from the 
owners of the factory to the operatives. As the ownership of 
the cloth passed successively to the wholesale dealer, to the 
tailor, and the owner of the coat, every transfer was balanced 
by a flow of currency between the same parties in the opposite 
direction. The same thing is evidently true of all industrial 
operations. For every such operation there is a corresponding 
flow of the currency. 

We are mainly concerned with the converse proposition 
that, omitting exceptional cases to be considered presently, 
every money payment is made to facilitate the progress of 
goods or services from those who own or render them to those 
who want them. This follows from the general principle that 
no one pays out his money unless he receives an equivalent, 
and that he always pays it in such a manner as to get the great- 
est equivalent he can command. Hence, as a general rule, 
payments of money are made only for the services which they 
can most advantageously command, and every money payment 
is balanced by a corresponding transfer of services of some 
kind. 



330 TUE SOCIETABY CIRCULATION. [IV. 10. 

10. A third principle touching the industrial circulation is 
that there is a certain amount of that circulation which is most 
conducive to human well-being. To show what this maximum 
is, let us commence with a simple example. Here is a shoemaker 
who has a wife and two children to support. He can work a 
certain number of hours in the day, six or eight perhaps, with 
positive pleasure to himself. Work beyond these hours grad- 
ually becomes more and more irksome. The first additional 
hour he will think little of, the second he will have more aver- 
sion to, the third yet more, and so on. A point will at length 
be reached when he cannot work longer unless at the expense 
of his health. 

Now, under the laws of demand and supply, he can obtain a 
certain amount of sustenance with his eight hours of agreeable 
labor. If this sustenance is all his family want, the problem of 
his existence will be a very simple one. But we may be sure it 
is not all they want. If it suffices to give them cotton curtains 
to their windows, they will want lace ; they will want the choice 
cuts of beef rather than the coarser ones ; and the wife will 
want to hire a seamstress instead of mending the clothes her- 
self. The man will therefore certainly work a little more than 
the number of hours agreeable to him. The limit of advanta- 
geous working is reached when the additional sustenance which 
he' can obtain by additional work will not compensate for the 
irksomeness of the labor. At this point he will stop working 
of his own accord. For the number of hours up to this limit 
he can command a certain amount of money yearly. This 
amount will be, so far as he is concerned, the most advanta 
geous flow of the currency from his customers to him. If he 
works longer, the irksomeness of the labor will more than bal- 
ance the benefit derived through the additional monetary flow. 

What is true of this shoemaker is true of everybody. 
There is a certain maximum amount of labor which, whether 
applied to production or exchange, cannot be exceeded with- 
out disadvantage to the individual. Every man must be 
his own judge of this maximum, because it depends upon his 



IV. 10.] THE EQUATION OF SOOIETAET CIRCULATION. 331 

health, habits, the wants of his family, and his own desire for 
wealth. We may therefore regard the flow of the currency 
as measuring, in the normal state of society, that particular 
amount of industrial circulation which on the whole is most 
conducive to the enjoyment and well-being of the community. 

It is true that this proposition runs counter to current no- 
tions. The popular opinion is that almost every man in the 
community wants more employment than he can get. Mer- 
chants are sorry when business is dull, and glad when it is so 
brisk that they have hard work to keep up with it. Laborers 
are often out of employment entirely, although they profess 
their willingness to work for even lower wages than the pro- 
ducts of their work ought to entitle them to command. But a 
fallacy underlies these conclusions. The fact is that the aver- 
age man does not want to do any more work than he does. 
Many laborers desire laws to prevent them working more than 
eight hours a day. What everybody wants is, not to render 
more service, but to get more pay for that which he does ren- 
der, which is a very different thing. That is to say, he does 
not wish to increase his part of the industrial circulation, but 
he does want to increase the flow of currency to him which 
should balance his contribution to the industrial circulation. 
In other words, he wants to establish a higher scale of prices 
for his services. The greater the demand the higher the price 
he can charge. Hence his desire for increased demand. 

The wish for high prices being entertained by all men, there 
is a force akin to pressure tending to make the scale of prices 
as high as possible. Now, the very fact of this pressure re- 
acts upon the circulation itself. Bearing in mind the proposi- 
tion already reached, that every transfer must be balanced by 
a corresponding payment, it follows that there cannot be any 
greater industrial circulation than that measured by the flow 
of the currency. But the higher the scale of prices the less 
industrial circulation a given flow will measure. In other 
words, in our equation, if we suppose Y X R to be fixed, 
then KxP must be fixed ; so that the larger we make P the 



332 THE SOCIETARY CIRCULATION. [IV. 11. 

smaller must be K. Hence the combined efforts of every 
man to command as high a price as he can for his services 
may result in himself or some one else not being able to con- 
tribute his normal amount to the industrial operations of the 
social organism. 

11. Exceptions to the Equation of Societary Circulation. 
With every such general proposition of economics as this, we 
are to consider to what limitations and modifications it is sub- 
ject. The first and most obvious limitation is that the act of 
incurring debts prevents it from being necessarily fulfilled at 
all times. When a debt is incurred, a transfer forming a part 
of the industrial circulation is made without any corresponding 
transfer of money in the other direction. If the debt is not 
paid during the year, we shall find in the sum total of the in- 
dustrial circulation certain transfers which are not balanced by 
the societary circulation. But since, as a rule, the debt is paid 
at some time, it follows that in the long-run the balance will be 
made good. Moreover, taking each year by itself, the chances 
are that the excess of industrial circulation arising in this way 
towards the end of the year will be balanced by the payment 
of debts incurred during the year before. 

It may be truly said that in cases of bankruptcy the payment 
is never made. If, then, we are to be quite strict, we should add 
to that side of the equation which represents the societary cir- 
culation a certain quantity indicating the loss from bankruptcy. 
The reader can do this, if he chooses, by writing the equation in 
the form 

K X P = V XE + B; 

B representing the loss by bankruptcy. 

This modification would not materially affect the conclusions 
drawn from the equation, and therefore need not be further 
considered. 

It may also happen that two persons, A and B, have made 
a direct exchange of goods and services, and that the only 
money that passes between them is a balance due from one 



IV. 11.] TEE EQUATION OF SOCIETABY CIRCULATION. 333 

to the other. Then there would be a portion of the industrial 
circulation not balanced by a flow of currency. As a general 
rule, however, money passes between any two parties only in 
one direction at any one time. That is, if A buys from B, 
and B from A, it will commonly happen that A pays B and 
B pays A separately. Practically the cases are too few to be 
of any importance, the flows of money between any two per- 
sons being generally in one way only, and of commodities the 
other way. To include this exceptional case we have only to 
draw two veins between the circles representing the persons. 

The opposite result occurs in great speculative transactions. 
In the Chicago markets the ownership of large quantities 
of wheat may at various times pass back and forth between 
parties, either with or without corresponding direct payments. 
So also, in New York, speculative sales of railway and other 
shares are made on a large scale. For reasons which will be 
presently shown, such sales, and the payment made for them, 
should be excluded from our sums total. 

Yet another disturbance of the equation arises when A pur- 
chases from B, and B from C, and A pays C directly, and thus 
cancels both debts with one payment. To represent all the 
transactions, such a payment should be counted as made from A 
to B and again from B to C, and the veins should be drawn 
accordingly. 

Yet another partial exception to the equation occurs in the 
collection of government revenues. When government col- 
lects a tax from the people, there might appear to be no in- 
dustrial flow back to the taxpayers to balance the monetary 
flow embodied in the tax. "We may, however, consider the 
general benefit rendered by the government as such an indus- 
trial flow, and then the balance will hold good. But if govern- 
ment borrows money, there is no flow of services from the 
government to the borrower. "When, year after year, the gov- 
ernment slowly pays off the debt, there is no industrial flow 
from the bond-holder to the government. These cases consti- 
tute another general exception to the equation. The same ex- 



334 TEE SOCIETABY CIRCULATION. [IV. 12. 

ception arises whenever a flow of currency consists in bor- 
rowing money to be subsequently repaid. 

For the most part these exceptional cases do not need to be 
treated in connection with the main principles of the subject. 
Onr proper course is first to consider the action of cause and 
effect as it would be were the balance of the two flows always 
perfect, and afterwards to consider, so far as may be necessary, 
what disturbance or change is produced in the exceptional cases. 

12. Illustrations of the Societary Circulation. In the 
graphic representation of the monetary flow already given, 
each separate person was separately represented. But in 
considering the action of economic causes upon classes of 
men, we cannot consider each individual separately, but have 
to treat whole classes together. For example, we may con- 
sider all the shoemakers in a city, in the country, or in the 
world, represent them by a circle, and then suppose a flow 
of money to them and another from them. The flow to them 
will consist of all the payments made for the purchase of shoes ; 
the flow from them will consist of their payments for leather 
and other capital, and for their own sustenance. We may 
also consider our class to include the whole body of men en- 
gaged in producing anything to be made into shoes — shoe- 
dealers, leather-makers, and even the raisers of the cattle 
whose hides went into the leather. If, however, we wish to 
consider the separate relations of these classes, we may sub- 
divide them to any extent, and have different classes for the 
shoemakers, the shoe-dealers, the tanners, and so forth. 

On this system let us represent graphically the operation of 
levying a tax in order to pay off a debt due the public creditors. 
We draw one circle to represent the public treasury ; another 
circle, which we call society, represents the totality of the 
taxpayers, bond-holders excepted ; a third circle represents 
the bond-holders or public creditors. We draw a vein from 
society to the public treasury, showing the flow of money 
from the people to the government, in payment of the tax. 



IV. 12.] THE EQUATION OF SOCIETARY CIRCULATION. 335 

We draw a second vein from the public treasury to the bond- 
holder, showing the payment to them to extinguish the debt. 
But the operation is not complete 
until the money gets back into the 
possession of society at large. If 
the bond-holders spent the money 
for miscellaneous purposes, it would 
go directly to society at large, and 
we should draw a third vein, when 
the circuit would be complete. This 
is shown in Fig. 2. 

But suppose the bond-holders spend the money in building 
a railway. Since railways are built only by certain special 
classes of people, we may consider their functions as separate 
from those of society in general. The circulation will then be 
as in Fig. 3. Here the stream subdivides. One branch goes 
directly or indirectly to the laborers who excavate the road. 




Fig. 2. 




Another portion goes to steel- makers who furnish the rails. 
A third goes to lumbermen who supply the ties. The fourth 
we may consider as going to unenumerated classes of people, a 
part of society at large. Thus we have four flows, a, h, c, d, 
going from the bond-holders which are together equal to the 
one flow from the public treasury. As represented in the dia- 



336 



THE SOCIETABT CIRCULATION. 



[IV. 12. 



gram, two flows go from the steel-makers, one to society at 
large, and one to the owners of iron ore. 

All the other flows we draw to society. Thus, taking the 
classification we have given, the single flow of money which 
went into the public treasury returns in five different streams. 
Of course, by subdividing the streams still further, we might 
have had a thousand or ten thousand return flows ; but in any 
case their sum total would have been equal to the outflow of 
taxes, or, to speak more exactly, equal to the flow from society 
into the treasury of that portion of the tax used in paying off 
the bond-holders. 

As another illustration, let us draw a diagram representing 
the flow of the rents paid to a landlord by his tenants, in 




case the landlord spends one portion of his rents for his own 
support and the remainder in building new houses. The 
tenants derive their income by rendering services to soci- 
ety at large, no matter what particular persons. The flow of 
those particular moneys paid for rents is represented by the 
vein from society to the tenants. That portion of the land- 
lord's income which he spends for his own sustenance is repre- 
sented by the vein c drawn from him to society at large. But in 
building houses he employs bricklayers, carpenters, painters, 
lumbermen, and so forth. If we include the lumbermen with 



IV. 12.] THE EQUATION OF SOOIETARY CIRCULATION. 337 

the carpenters, the brickmakers "with the bricklayers, etc., which 
we do merely to simplify the diagram, we may consider three 
classes of men to whom go the three flows d, e,f. These three 
flows, together with the fourth one, c, going directly to society, 
are equal to the flow b to the landlord. All the classes of 
men who build the house draw their sustenance from society, 
so that we have the outflow from society to the tenants com- 
pensated by four inflows, thus completing the circuit. 

As in the former case, we might have subdivided the flow 
among many hundreds or thousands of different classes, includ- 
ing the iron-founders, owners of iron ore, managers of saw- 
mills, land-owners, etc. The reader can do this to any extent 
he desires, when he finds it necessary to consider the effect of 
the operation upon any particular class of men. But this fur- 
ther subdivision does not change the total amount of the flow, 
but only splits it up among a greater number of classes. 

ILLUSTRATIONS AND EXERCISES. 

1. Our government is employing a portion of its taxes in buildiDg up a 
navy, principally of iron. Draw a diagram showing the principal classes 
of people through whom the money thus levied goes back into the pockets 
of the taxpayers, and the lines of flow. 

2. Draw a diagram showing the changes in the flow if, in lieu of build- 
ing the navy, our government expended its taxes in erecting fortifications 
and supplying them with heavy guns. 

3. A government being about to engage in war, a man of great wealth 
employs a portion of his income from houses and lands in equipping a regi- 
ment of cavalry. Draw a diagram representing the flow thus arising. 

4. Draw a diagram showing the various classes of people among whom 
the money paid for a coat may be considered as divided. 

5. Do the same thing with the money which the inhabitants of a city 
pay for bread. [In the last three questions there is not necessarily any 
return flow to be drawn.] 



22 



338 TEE SOCIETARY CIRCULATION. [IV. 14. 



CHAPTER III. 

VARIATIONS LN THE EQUATION OF SOCIETAEY CIRCULATION. 

13. It is necessary at the outset that we have clearly in 
mind the results reached in the last two chapters. They may 
be summed up as follows : 

I. There is a certain definite mass of money, notes, and credit 
in circulation, the amount of which, in dollars, we call the vol- 
ume of currency, and represent by the symbol Y. 

II. Each dollar of this mass circulates with greater or less 
rapidity. The average rapidity we represent by the symbol R. 
We conceive R to represent the average number of times which 
each dollar changes hands in the course of the year. 

III. It is necessary to the well-being of a community that a 
certain sum total of transfers of wealth and services should be 
made between its members. The total of these transfers during 
the unit of time, measured in dollars of absolute money, — that 
is, on the unit scale of prices, — is represented by the symbol K. 

IY. Representing by F the ratio of the actual scale of 
prices to the unit scale, the value of the absolute dollar meas- 
ured on that scale will be equal to P. The amount of busi- 
ness expressed in the current scale of prices will then be K X P. 

Y. This being the case so long as all the processes of buying, 
selling, incurring debts and paying them go on at a regular 
and uniform rate, we have the equation 

Y X R = K X P. 

14. All four of the quantities Y, R, P, and K are subject to 
change. Let us first consider the changes to which Y, or the 
total volume of the currency, is subject. Were no money or 
credit ever introduced into or withdrawn from the circulation, 
no change could occur in its total volume. But in the actual 



IV. 14.] THE EQUATION OF SOCIETABY CIRCULATION. 339 

case a circulating dollar may go out of the regular course of 
circulation in any of the following ways : 

I. If it is a coin dollar, it may be withdrawn through being 
melted into bullion or exported to a foreign country. Since we 
are considering only the operations within a certain community, 
we regard money as outside the field of our circulation when it 
passes outside the community. If, as we might well do, we 
suppose our community to include the whole world, then there 
would be no diminution of the total volume of the currency by 
the export of coin. But there would still be a diminution when- 
ever coin was melted down. 

II. Credit-money is withdrawn by the payment of debts 
to banks. If a merchant who has a note in bank pays it 
in coin, that coin goes into the vaults, and is out of circulation 
until it is loaned to somebody else. If he pays it in bank-notes, 
the same thing is true. If he pays it by a bank cheque, he 
transfers to the bank a certain credit either on itself or on 
some other bank. In either case this credit is cancelled until 
a new loan is made, and thus the volume of credit-currency is 
diminished by the amount of the payment. 

Of course the volume of currency is increased by the reverse 
operations. Every dollar of bullion which is coined adds one 
dollar to the money in circulation. Whenever a loan is made 
at a bank, the amount of the loan is added to the circulation, 
as already shown in the chapter on banks. 

It may be remarked that neither the payment of ordinary 
commercial debts nor the deposit of money in a bank changes 
the volume of the currency. In the first case we have only a 
transfer of money, which the receiver takes for the purpose of 
transferring it again as soon as he has occasion. The transfer is 
therefore simply an ordinary money payment. If the money 
is deposited in a bank, it is true that that particular money 
does for the time being pass out of circulation. But an addi- 
tion equal to the deposit is made to the credit-currency by the 
depositor having the right to draw cheques on the bank, so 
that the total volume is the same as before. 



340 THE SOCIETART CIRCULATION. [IV. 15. 

Hence when the banks discount new notes in greater quan- 
tity than the old ones are being paid off, they increase the vol- 
ume of the currency. The banks are then said to expand the 
circulation. When they demand payment of maturing notes 
to a greater extent than they discount new ones, they contract 
the circulation. 

15. Changes in Rapidity of Circulation. Every cause 
which leads a man to hesitate before spending his money tends 
to diminish the rapidity of circulation. Every cause which 
tends to make him pass it off quickly tends to increase it. We 
now have to inquire whether there are any causes which may 
be from time to time operative upon a whole community, so as 
to make all or the general body of its members desirous of ex- 
changing their money more or less rapidly than usual. Busi- 
ness men almost universally believe in such changes. " Dis- 
turbance" and " stagnation" of business imply a diminution in 
R. " Briskness" implies that, so far as those who find busi- 
ness to be brisk are concerned, the circulation is rapid. Con- 
clusions drawn from the experience of men of business in this 
particular case are, however, rather unreliable, and we must 
look at the matter more closely. 

Money circulates with a normal rapidity, which we may re- 
gard as a healthy maximum, when every man who earns money 
can immediately pay it out with a result satisfactory to him- 
self. Every cause which leads him to doubt what is the most 
satisfactory disposition to make of his money interferes with 
his expenditure, and leads him to keep his money longer than 
he otherwise would. The general rule will be that before he 
receives his money he forms more or less definite conclusions 
as to what he will do with it. If anything happens to disap- 
point the expectations on which those conclusions are based, 
he is likely to keep his money longer than he otherwise would. 
Let us see what examples of this we can find. 

If in a manufacturing establishment an unexpected dis- 
agreement occurs between the employers and the operatives, 



IV. 16.] TEE EQUATION OF SOCIETABT CIRCULATION. 341 

the money which the former received in the course of business 
no longer goes to the payment of the latter, and remains for a 
longer period on their hands than it would otherwise have done. 
Thus every strike on the part of laborers tends to diminish the 
rapidity of circulation. If prices unexpectedly rise in conse- 
quence of the strike, purchasers will delay buying, and a still 
further block in the circulation may arise. In periods of un- 
certainty, investors of money, that is, purchasers of capital, be- 
come apprehensive, and their money lies on their hands longer 
than it would otherwise have done. 

On the other hand, mere " hard times" does not necessarily 
imply any diminution in the circulation, though they may 
arise from that cause. When business of some one kind is 
very dull it may happen that the people who ordinarily spend 
their money in that particular business are spending it in 
some other way. It is therefore impossible to conclude with 
entire certainty whether the circulation is more or less rapid 
than usual ; but we may suppose it true that, as a general 
rule, when business is dull in all its branches the circulation is 
less rapid than when it is brisk. 

A very potent cause of increase in the rapidity of circulation 
is the issue of irredeemable money. Such an issue leads, as will 
hereafter be shown, to a rise in prices. The prospect that 
prices will rise makes a large number of people anxious to 
purchase as soon as possible, and thus to obtain all the money 
they can get. It therefore causes business to be very brisk for 
the time being. Conversely, the prospect that there will be a 
fall in prices leads people to postpone buying as long as possi- 
ble, and thus tends to diminish the rapidity of circulation. 

16. Next let us consider the changes in the product 
K X P. Remembering that this product signifies the entire 
exchange transactions of the community, measured in current 
dollars, we perceive that it may change from two causes : 

I. The actual increase or diminution in the quantity of goods 
which change hands, represented by K. 



342 THE SOCIETABY CIRCULATION. [IV. 17. 

II. A change in the general scale of prices at which the 
goods are sold. This scale is P. 

For example, if exactly the same transactions should take 
place this year as last, but at double the price, then, although 
there would be no change in the actual transactions, yet, since 
every sale was made for twice as many dollars, the numerical 
measure of K X P would be double that of last year. "We 
must therefore carefully distinguish between these two causes 
as affecting the measure of the industrial circulation. As a 
general rule the actual exchanges will not vary rapidly so long 
as things go on in their regular way. It is of course to be ex- 
pected that in a growing country they will increase from year 
to year as population increases and production improves. As 
already shown, there is a certain amount of these transactions 
which is most advantageous, and in which everything goes on 
as nearly as possible to every one's satisfaction. So long as this 
happens it makes no difference, except indirectly, what the 
scale of prices is. All our current wants would be as well sat- 
isfied on a scale of half-dollars as on one of two dollars, always 
provided that the change is carried through so as to include all 
services rendered. Practically, however, it is impossible to 
carry such a change uniformly through, and therefore it is to 
the best interest of society to have as little change as possible 
from month to month and from year to year. 

17. Effect of Changes in the Volume of the Currency. 
In the social organism demand is exercised only through the 
instrumentality of the currency. Whoever purchases anything 
in market must have the money to pay for it, either in hand 
or in prospect. Since, then, his power of demanding is limited 
by his power of commanding money, we may consider money 
as in some sort the instrument of demand. We have now to 
consider the effect upon demand, price, and supply produced 
by changes in the amount of money in circulation, or the vol- 
ume of the currency. 

To make the state of the case as clear and simple as possible, 



IV. 17.] THE EQUATION OF SOCIETART CIRCULATION. 343 

suppose that a beneficent government or any other power should 
distribute live dollars in paper money or coin to every person 
within its sway: what would be the consequence ? Firstly, since 
a very great majority of the recipients would feel the want of 
something which the money could buy, they would proceed to 
purchase the necessaries of life from the dealers. The latter 
would therefore find their stores unusually crowded, and would 
speedily have to send to their wholesale dealers for an increased 
stock. The latter, again, would call upon the producers for an 
additional supply of goods. The result of this increase of de- 
mand would, as shown in III. 17, 21, be a rise in price. 

We might also expect an increase in the production, and 
therefore in the supply. This expectation, however, would 
probably be disappointed, because, by hypothesis, each and 
every producer has his five dollars and, for the time being, 
would be more anxious to buy something with it than to keep 
up his business. So long as everybody crowded to the stores to 
buy, everybody would have to leave off work, for a while at 
least ; and although the prospect of an increased price would 
be an inducement to produce more, yet, on the other hand, the 
feeling of increased wealth would lessen the stimulus to hard 
work, and would therefore counteract the action of that cause. 
"We should therefore have two effects from this influx of money : 
firstly, a general selling off of the store of products through 
the channels of business ; secondly, a general rise of prices. 

This rise of prices would affect different classes differently 
according to their position. The man who promptly spent his 
money would be the richer ; the man who did not spend it until 
after prices had risen would not be so well off. Nearly every 
one engaged in trade would profit by the increased prices, and 
be encouraged by the increase of his business. "Workers for 
wages and men on salaries would find the week following that, 
owing to the rise in prices, they were unable to purchase as 
much as before. Possibly in one or two weeks they would 
find their whole gift absorbed in the increased prices they would 
have to pay, so that they would be worse off than before. They 



344 THE SOCIETABY CIRCULATION. [IV. 18. 

would therefore be compelled to demand an increase of wages 
which they might ultimately get after more or less suffering. 
The general selling off of goods would result in the scarcity 
of a great many things that people who did not buy them at 
the time would want, and this would have to be made up by 
increased work in some directions. 

The final result would be that all prices and all current 
wages would rise in nearly the same proportion. Each in- 
dividual would therefore be able to command.no more of the 
necessaries and comforts of life than before he had received 
his five dollars. So far as current operations are concerned, 
neither harm nor good would on the whole be done. Some 
would gain and some would suffer. 

The case is different when we consider future debts and 
payments. Every person who had loaned money would, when 
he received it, find that he could purchase less of the neces- 
saries of life than before. He would therefore be a positive 
loser ; the debtor would be able to command the money with 
less labor, and would therefore be a gainer. 

The reverse effect would result if the volume of the cur- 
rency were diminished by taking money from the community. 
There would be a falling off in the sales of all dealers, and 
hence a depression in trade generally. The falling off in de- 
mand would lead to a fall of prices, and wages would have to 
be lower or production would be temporarily stopped. Debt- 
ors would lose by having to work more, or sell more goods to 
command the money which they had agreed to pay; and cred- 
itors would gain by being able to purchase more with the pro- 
ceeds of their debt. 

18. Effect of Varying Indebtedness. In establishing the 
equation of the societary circulation, it was assumed that the 
payment of debts throughout the organism kept pace with 
their incurrence, so that the two balanced each other. Now 
this is not always the case. The history of commerce shows 
periods of great buoyancy of feeling and tendency to specula- 



IV. 18.] TEE EQUATION OF SOCIETART CIRCULATION. 345 

tion, when men of business incur debts on a larger scale than 
usual. Since every debt is incurred on account of some trans- 
fer of goods or services, for which no money payment is made 
at the time, it follows that the whole mass of indebtedness 
represents that portion of the industrial circulation which has 
not yet been balanced by the monetary circulation. At the 
same time, as already remarked, if this mass of indebtedness is 
not increasing, the two circulations must still balance each 
other, because the unbalanced portion of the industrial circu- 
lation, for which indebtedness is being incurred, is then bal- 
anced by the equal payment of former debts. 

But if the mass of indebtedness is increasing, there is then a 
portion of the industrial circulation which is not balanced by 
the monetary flow at all, and thus the equation is disturbed. 
How important the consequence of this is will be seen by re- 
flecting that if people stopped paying off their old debts, and 
bought everything on credit, the monetary flow would for the 
moment entirely cease. This is of course an extreme case. 
But let us suppose as a possible case that one fourth the volume 
of current business is done on credit, while the old debts are 
left standing. The result will be that the industrial flow will 
be to the monetary flow in the ratio of 4 : 3. If before this 
state of things commenced the two flows balanced, then when 
the speculation begins there will be an apparent redundancy of 
the monetary flow, because the volume of currency suffices 
for the flow 4, while only the flow 3 is required. The result 
will be the same as in the case of an increase of the volume of 
the currency ; that is, a universal demand for commodities of 
all kinds, with a tendency towards a rise of price. 

When the indebtedness is to be paid off the reverse effect 
occurs. If the volume 4 of regular business is to continue, and 
a volume 1 of indebtedness is to be discharged, there will be a 
call for a monetary flow represented by the number 5. But, 
on the scale of prices established by the speculation, the actual 
volume of currency only suffices for the volume 3 of exchanges. 
Thus arises a state of things to be subsequently discussed. 



346 TEE SOCIETART CIRCULATION. [IV. 19. 

19. Fundamental Law of Value of the Total Volume of 
Currency. The law which would determine the amount of va- 
riation in wages and prices in every case, after things had been 
readjusted on the new basis, can be got at by considering that 
in the industrial circulation nothing would really be changed 
except the scale of prices. The quantities purchased being 
the same as before, K remains unchanged. In the equation 
K X P = TX R, R also would be unchanged ; whence it 
follows that the rise in the price P would be proportional to 
the increase in the total volume Y of the currency. For 
example, if in the beginning the total volume of the currency 
had averaged $10 per capita, then a gift of $5 to eVery person 
would add 50 per cent to the volume of currency. To re- 
store the equilibrium, the scale of prices, represented by P, 
would have to be increased 50 per cent also. If, instead of 
adding 50 per cent to the currency, it had been doubled, prices 
would double. After the equilibrium was restored every two 
dollars would do the same work which one dollar had done 
before. Leaving out the case of debtors and creditors, and 
the temporary disturbance before equilibrium was restored, 
everything would be readjusted on this basis of double prices. 

Since the volume of currency and the prices would be in- 
creased in the same proportion, it follows that the quantity of 
goods whose value would equal the total volume of the cur- 
rency would remain unchanged. We may express this result 
in the following form : 

When the volume of the currency fluctuates, other condi- 
tions being equal, the purchasing power of each unit of 
money varies inversely as the whole number of units, so that 
the total absolute value of the whole volume of currency re- 
mains unaltered by changes in that volume. 

The question now arises, What fixes this absolute value of 
the total volume of currency? To answer this let us return to 
the equation of societary circulation, Y X E = K X P. Here 
R represents the number of times that a dollar changes hands 
in a year. If we divide the year by R, we shall have the 



IV. 19.] TEE EQUATION OF S0C1ETART CIRCULATION. 347 

average length of time that a dollar remains in one man's 
hands. If we take this period instead of one year as our unit 
of time, we shall have K = 1. K will then be the total value 
of the exchanges during this period, measured on the unit 
scale for which P = 1. Thus the equation will become V = K. 
We conclude : 

The absolute value of the total volume of currency circulat- 
ing in a social organism is equal to that of the total indus- 
trial circulation of the organism, during the average time that 
apiece of money remains in one mail's hands. 

EXERCISES. 

1. If the rapidity of circulation should be doubled, what change would be 
made in the volume of the currency in order that the same business should 
be transacted on the same scale of prices ? (Deduce the result from the 
equation of societary circulation.) 

2. Show how the answer to the above question follows from the second 
theorem of § 19. 

3. When the volume of the currency increases, the equation 

K XP = VXR 
can be kept up by increasing K as well as by increasing P; that is, by in- 
creasing the volume of business transacted as well as by raising the price. 
Show why it is that it is P rather than K which responds to the stimulus 
of an increase of V. 

4. Do you interpret the first theorem of § 19 as meaning that the absolute 
value of the whole volume of currency remains unaltered even when popu- 
lation and business increase ? If not, how will this absolute value change 
in this case? Apply your answer to the second theorem. 

5. If a continually increasing volume of business has to be transacted 
with an unvarying volume of currency, what will be the effect on prices? 

6. If producers, laborers, and dealers of every class should combine to 
raise prices ten per cent, and refuse business on any other terms, what effect 
would this action have on the amount of business transacted? 

7. If everybody believed that prices were going to fall, what effect would 
this belief have on the rapidity of circulation? 

8. If a large portion of the material currency in circulation consisted of 
interest-bearing bank-notes, what would be the effect on R and P? 



348 TEE SOCIETABY CIRCULATION. [IV. 20. 



CHAPTER IV. 

THE MEASURE OF DEMAND BY ABSOLUTE VALUE. 

20. Most of the economic causes which we have heretofore 
considered produce their effect by or through their influence 
upon demand. Although the theory of this influence may be 
regarded as entirely contained in the separate results of the 
preceding chapters, yet, in order to give entire precision to our 
conclusions, it is necessary to bring our separate results together, 
and show how they coalesce into a single theory of demand as 
a mathematical quantity. Let us begin by repeating our defi- 
nitions and conclusions respecting demand given in the oj)ening 
chapter on that subject. 

The demand for a specific commodity, considered as a 
mathematical quantity, means how much of that commodity 
can be sold — 

In a definite market, say New York, Chicago, or the entire 
country, 

During a fixed period of time, say one year, 

In a certain condition of society or state of the market, 

And at a certain price. 

Regarding the principal places or combination of places 
which we take as our market, and the period of time, as fixed 
quantities whose changes we have no need to consider, we see 
that the amount of the demand will depend upon and vary 
with the third and fourth conditions, namely, (1) the price 
charged, and (2) the condition or wants of the public in rela- 
tion to that commodity. These innumerable varying conditions 
may be summarized under the single comprehensive and there- 
fore somewhat ill-defined term state of the market. 

"With regard to the first cause we have found the law to be 
a very simple one, namely, the higher the price the less the 



IV. 20.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 349 

quantity demanded. We may assume the action of this cause 
to be thoroughly understood, and to need no further elucida- 
tion. It is the second group of causes, comprehended in the 
term " state of the market," with which we are concerned. In 
accordance with a general principle of scientific inquiry, we 
have to investigate the action of this cause on the supposition 
that all other conditions are equal. We must therefore sup- 
pose that in our market, and during the period which we con- 
sider, a fixed and invariable price is put upon the commodity. 
The quantity sold will then vary only with the state of the 
market. If more people are buying flour at five dollars per 
barrel this month than last month, it will show that there has 
been some change : perhaps a foreign demand ; v perhaps some 
new use for flour ; perhaps greater ability on the part of the 
public to buy ; perhaps any other of an innumerable series of 
causes. We" thus get an idea of a demand which does not mean 
quantity really sold, but the quantity which would ^ oe sold 
supposing the price to he fixed and invariable. This is the or- 
dinary mercantile meaning of demand as a quantity, and must 
not be confounded with " the definition formerly given. An 
example will make the distinction clear. 

The producers of nickel may be able and willing to turn out 
the same number of pounds of that commodity annually, year 
after year. Then if, from any cause whatever, the state of the 
market so changes that there is an increased demand, the pro- 
ducers will raise the price until the demand is brought down, 
as before, to the supply, which we suppose to remain invaria- 
ble. We should then have the demand and price rising and 
falling together, in accordance with the second law as laid down 
in IIL 16. The difference between the two definitions of de- 
mand will then be seen in this form : Since, by our hypothesis, 
the quantity really sold is the same in the two cases, the actual 
demand, as above defined, has remained the same. But, in mer- 
cantile language, there has been a change in the state of the 
market, such that more nickel would have been demanded at 
a fixed price than before, and thus, by the second method of 



350 THE SOCIETARY CIRCULATION. [IV. 21. 

measurement, demand has increased. We see, then, that there 
are two distinct ways of measuring demand between which we 
must carefully distinguish. Both are perfectly legitimate, and 
may be useful if we do not confound them. A clear concep- 
tion of each is all that is necessary to avoid confusion. These 
conceptions may be assisted by calling the one the actual de- 
mand, or the quantity sold, and the other the market de- 
mand, which expresses the wants of the public. The market 
demand will then be a hypothetical quantity, expressing the 
apparent want of the public for a commodity, and the actual 
demand will be the quantity really sold. 

21. The relation of these two measures of demand can be 
made quite clear by the use of algebraic symbols. It has been 
pointed out (III. 15) that the general average relation between 
demand and price may be approximately expressed by saying 
that demand varies inversely as price. The fact that two quan- 
tities vary inversely is expressed algebraically by saying that 
one is equal to some constant quantity divided by the other 
(III. 7). Hence if we put 

P, the price at which a commodity is offered, 
D, the quantity which will be bought at that price, 
then the relation between D and P will be expressed by such 
an equation as 

D=4 (1) 

where we put M for some constant quantity. So long as M 
remains unchanged, D will increase as P diminishes, and di- 
minish when P increases. 

In order to learn how much of the commodity can be sold at 
a given price, say $3 per pound, we must know M as well as P. 
Our equation will be, in this case, 

^ 3 

The quantity M is what we have called the market demand, 
or the public want for the commodity. If we suppose P to 



IV. 22.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 351 

stand fixed at $3, then D will increase when M increases, and 
vice versa. The greater the number of people, the more they 
want the commodity, and the better able they are to buy, the 
larger M will be. It therefore depends on all the circumstances 
which induce people to buy, except the price charged for the 
commodity. 

22. We have already seen that in the long-run, and omit- 
ting certain exceptional cases, the quantity of each commodity 
sold is necessarily equal to the quantity produced. Hence when 
we speak of the actual demand we cannot correctly talk about 
variations in that demand without corresponding variations in 
the supply, because that demand is equal to the supply. We 
cannot correctly say that any cause will increase the demand 
unless it increases the quantity of a commodity brought to 
market and sold. Since, in the discussion alluded to in the be- 
ginning of this chapter, what is called demand is the desire of 
the public for certain services or commodities which are sup- 
posed not to depend upon the quantity of those commodities 
produced, but upon the state of the market, it follows that it 
is the market demand which is there considered. We shall there- 
fore in the present chapter use the term demand to signify the 
market demand, and so shall suppose it to express a certain con- 
dition of the market, having no reference to the real market 
price, but expressing how much of the commodity can be sold 
in a fixed period of time at a fixed price. 

Accepting this definition, we have pointed out a cause which 
immediately affects demand. With every addition to the flow 
of the currency there is an increased demand for all commodi- 
ties, no matter whether the augmentation of the flow arises 
from an increase in Y or in ~R. Hence we may say the market 
demand for things in general is proportional to the flow of the 
currency, as already defined. 

We have called the market demand hypothetical. The rea- 
son is clear. The quantity actually sold cannot exceed the sup- 
ply. Therefore if we suppose a constant and rapid increase of 



352 TEE SOCIETARY CIRCULATION. [IV. 22. 

the currency constantly going on, without any increase of sup- 
ply, while the price is fixed, the whole supply of goods on hand 
might be speedily sold out and. the operation of buying would 
have to stop. In actual trade the price always rises under such 
circumstances. Hence the case of a fixed price is necessarily 
hypothetical. But though hypothetical, it affords us a method 
of measuring a certain quantity, namely, the ability and willing- 
ness of the public to buy, which is measured by the quantity they 
would buy at a fixed price. 

The question now arises, Is this measure of ability and will 
a true one ? are the public really any more able and willing 
to buy when the flow of the currency is increased than they 
were before ? The answer is that this depends on how we are 
to measure this ability and willingness. In a certain sense they 
are more so ; and in another, and perhaps more exact sense, they 
are not more so. We have here our former case of measures 
by a varying foot-rule. If we agree to measure by a foot-rule 
which increases and diminishes in length from day to day in 
spite of all we can do, it is certain that any object that we 
measure will contain more feet one day than another. But if 
we consider length measured by an absolute standard, we may 
regard objects in general as being invariable in length. It may 
then be perfectly true that a piece of timber would measure 
more feet one day than another, although its real length should 
remain unchanged. 

So in the present case. If we measure the ability of the 
public to buy by the quantity of a commodity which they will 
purchase in a year at a price fixed in dollars, then the measure 
of that ability will undoubtedly increase with the flow of the 
currency. With every increase in the flow they will be able 
to buy more, because they have more dollars to buy with ; with 
every diminution in the flow they will be able to buy less; 
just as when we measure a piece of timber, the shorter the foot 
the greater the measure. 

But if we adopt an absolute standard, if we consider the 
quantity which can be bought, not at a price fixed in dollars, 



IV. 23.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 353 

but at a price fixed by a tabular standard of value, as described 
in Chapter II., then there can be no change in the general ability 
of the public to buy produced by changes in the flow of the 
currency, because the money price will then keep pace with 
the flow. 

These same statements apply to our measures of market de- 
mand. Let us recall the definition of this term. When the 
quantity of goods which can be sold at a fixed price increases, 
we say that the market demand increases ; when this quantity 
diminishes, we say that the market demand diminishes. Now 
if by the words "fixed price" we mean a fixed number of dol. 
lars, without reference to the absolute value of those dollars, 
then evidently our measure of the market demand becomes de- 
ceptive. Suppose, for example, that the volume of the currency 
is doubled, and that in consequence all measures of value in 
currency have doubled. Then every seller would meet a great 
rush of people to buy his goods. He might therefore say, " The 
market demand for my goods has doubled." But in reality he 
would be offering his goods at half the old price, and he could 
at any time cause the same rush of buyers by reducing his prices 
to one half. Hence in order to compare two states of the mar- 
ket at different times with respect to any commodity we must 
reduce the two prices of the commodity to the same tabular 
standard of value. When we find that a certain cause stimu- 
lates demand we must ascertain whether it does this merely by 
increasing the flow of the currency or by bringing other causes 
into play. 

23. We now recognize two measures of market demand : 
the current measure, expressed by money, and varying with 
everything that affects either the volume or rapidity of circu- 
lation ; and the absolute measure, which is expressed, not in 
money, but by the general average prices of commodities and 
services. It is necessary to have this distinction clearly in mind 
in all our discussions of the effect of economic causes upon de- 
mand. Causes which act through the general circulation by 
23 



354 TEE SOCIETART CIRCULATION. [IV. 23. 

adding to its volume or stimulating its rapidity affect the cur- 
rent demand, but not the absolute demand. Causes which act 
through supply, or by changing the wants of the community, 
by opening up new markets or by finding new uses for things, 
change the absolute demand. 

This distinction may be made clear by returning to the alge- 
braic equation and again considering the market demand M. 
The fact that this quantity varies directly as the flow of the 
currency is expressed by saying that it is equal to some constant 
quantity multiplied by that flow (II. 6). If we put 

1ST, this constant quantity, 

F, the flow of the currency, 
we shall therefore have, in equation (1), 

M = KXF (a) 

and 

p 

Thus if we call P' the quotient -, we shall have 

_r 

D = p- ( c ) 

Now let us notice the relation of these quantities. Equation 

(a) expresses the fact that if the flow F of currency increases, 

the market demand M will also increase. But this presupposes 

that we measure this market demand by the amount we can sell 

at a fixed price in current dollars. When the flow of the currency 

increases, these dollars become less valuable ; so that the price 

p 
in absolute measure is — , or P'. Hence the equation (c) ex- 

presses the actual demand when the price is reduced to absolute 
measure by allowing for changes in the absolute value of the 
dollar, and this demand is independent of the flow of the cur- 
rency. 

The conceptions of the three measures of demand just de- 
scribed are of such fundamental significance that we shall re- 
capitulate and condense them. 



IV. 24.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 355 

The current market demand for a commodity is the quantity 
of that commodity which a community would purchase in a 
year at a price fixed in dollars. 

The absolute market demand is the quantity the community 
would purchase at a price varying to keep pace with the abso- 
lute value of the dollar. 

The actual demand is the quantity which, as a matter of 
history, the community really does purchase. 

24. The great importance of the above principles arises from 
the fact that the public look upon increased demand as an eco- 
nomic good, and upon diminished demand as an economic evil, 
and are thus prone to consider demand as a measure of prosper- 
ity. "When the merchant finds more people coming to his store 
for his goods, and the laborer finds more people to pay him what 
he considers fair wages, there is a feeling on the part of both 
that they are benefited. Of course there is no corresponding 
feeling on the part of the buyers and the employers that they 
are injured, because if they had such a feeling they would not 
come forward with their demands. The fact that they do come 
forward demanding goods or labor shows that they expect to 
reap an advantage thereby. 

The reverse is true when the employer ceases to come for- 
ward, and the customer, having spent his money, stays away 
from the store. The merchant and laborer then feel that their 
prosperity is diminishing. 

Thus arises a feeling on the part of the community at large 
that those economic causes which stimulate demand should in 
some way be promoted, as being beneficial, and that those which 
diminish it should be avoided, as productive of evil. Since, then, 
with every increase in the volume or rapidity of the currency 
there is an increased market demand when measured in the 
usual way, and in fact in the only way in which we can practi- 
cally measure it for the time being, it follows that, by a nat- 
ural process, there is in society a certain tendency to favor every 
measure which will increase the volume or rapidity of the cir- 
culation. 



356 THE SOGIETAET CIRCULATION. [IV. 25. 

Both of these cases indicate changes in the current market 
demand, but we cannot tell whether they indicate changes 
in the absolute market demand until we know the causes at 
play. 

We have just spoken of measuring demand in currency as 
the only practical way of doing it for the time being. This is 
necessarily the case. We have no way of measuring demand 
at the moment in absolute measure, because it requires an elab- 
orate statistical investigation of the prices of commodities, 
which there is no authority to undertake. We are in the po- 
sition of a community which has no other than the varying 
foot-rule with which to measure its piece of timber, and which 
is therefore obliged to accept those measures for the time 
being, and to conclude upon absolute lengths, not directly from 
the measures, but from long-continued observation of their va- 
riations. So in economics, although we are obliged, to measure 
the current intensity of demand in terms of the circulation, 
yet we know that we are thus liable to be deceived, and that we 
must refer it to absolute measure whenever we are to get cor- 
rect results. 

25. We have now to show that changes in demand arising 
from changes in the flow of the currency neither lessen any 
avoidable evils nor lead to any attainable benefits. We say 
" avoidable evils " and " attainable benefits," because with these 
alone are we concerned in economics. If we look closely, we 
shall see that the current aspirations on the subject are directed 
towards a Utopia. People have in mind a certain ideal state 
of things, in which every laborer is constantly employed, every 
merchant has as many customers as he can wait upon, and 
every railway as much freight as it can carry. I say this idea is 
purely Utopian, for changes in the demand and supply of various 
commodities are absolutely unavoidable. The people want 
more of one thing to-day and more of another thing to-morrow ; 
next year they will leave off wearing something that they wore 
this year and take to something new. One month they will lay in 



IV. 25.] MEASURE OF DEMAND BY ABSOLUTE VALUE. 357 

a three months' supply of goods, and perhaps save their money 
for the two months following. Thus, as already shown, the 
processes of production do not go on in a continuous stream, 
but by a series of waves. Necessarily the employment of la- 
borers who are carrying on the processes vary in the same way. 
Now this class finds itself with nothing to do, and now that 
class. There is therefore but one possible way of insuring that 
every laborer shall be constantly employed. It is to require 
that he shall work every day for any wages that he can get, 
whether it is ten cents or ten dollars, and shall be put at work 
by the authorities if he is any morning found idle after the 
hour for commencing work. Thus the idea of remedying this 
evil is purely Utopian. No practical benefit can arise from dis- 
cussing any measures looking to finding employment for every- 
body all the time. 

What we are to remember in this connection is that the dif- 
ference between the two measures of demand for labor corre- 
sponds to a difference in the measure of the wages of labor. 
That is, we may measure the wages of the laborer either by 

The amount of money which he can receive for a week's 
work, or 

The quantity of commodities which he can buy with a week's 
wages. 

The first is the popular method of measuring. When we 
say that wages are higher in America than in England, we 
mean that the laborer can get more money for a week's work 
in America than in England. But it needs no argument to 
show that this is not the true measure of his prosperity, and 
that the real question is, How much sustenance can he com- 
mand in the respective countries ? It is also evident that 
any cause which enables him to command more money for a 
day's work, but which at the same time increases the amount 
which he must pay for his week's food and clothing, does not 
really do him any good. He may indeed, through his igno- 
rance of economics, be deceived into thinking that he is bene- 
fited by the higher wages ; but this is a kind of deception 



358 THE SOCIETARY CIRCULATION. [IV. 25. 

which he will not long submit to. Now a very little exami- 
nation will show us that an increase of the flow of the cur- 
rency can at best only raise the laborer's wages in money, and 
cannot increase the amount of subsistence which he is able to 
command with his day's work. That this must be so will be 
seen by looking at the subject from the communistic point of 
view (II. 54). The community at large, of which laborers of 
some kind form the largest portion, can be fed only with the 
food actually raised, and clothed only with the cloth actually 
made. But these actual quantities are dependent upon and 
limited by physical circumstances and cannot be altered by 
changes in the currency. 

To show how the same result follows from the point of view 
we have been taking in the present chapter, suppose an increase 
in the flow of the currency to take place just as an unemployed 
laborer has made up his mind how many dollars he considers 
an equivalent for his week's work. If he gets employment 
under the stimuli!* of. the increase and goes to work, then, be- 
fore he can spend his week's wages prices have risen a little. 
They rise still more before he can spend his second week's 
wages, and thus he continuously finds himself able 1 to buy less 
and less. He is therefore no better off than if he had gone to 
work in the beginning on unsatisfactory terms, and is obliged 
to demand an increase of wages, and probably be thrown out 
of employment, just as he was before in his efforts to get the 
present rate. He is therefore in no manner benefited by the 
increase of wages. 

So also with the general prosperity. An increase in the 
flow of the currency will cause a temjDorary wave in the 
flow of goods from the manufactories to the consumers. But 
this wave will inevitably be followed by a depression, and 
is therefore solely temporary in its effects. The only causes 
which permanently advance national prosperity are the slightly 
increasing improvements in production, new railways, new 
farms, new warehouses, improved machinery, improved orga- 
nization, of labor. 



IV. 27.] OF INDIVIDUAL INCOME AND EXPENDITURE. 359 



CHAPTER V. 

OF INDIVIDUAL INCOME AND EXPENDITURE. 

26. By the annual income of a person is meant the net 
sum of his wages, gains and profits during a year, whether 
derived from his own labor, his business management, or the 
interest upon his capital. To find its amount we must sub- 
tract from the sum total of moneys received by him in pay- 
ment the amount which he has had to expend in order to 
transact his business and keep up his capital. It is therefore 
the sum total of the monetary flow to him, diminished by the 
flow from him for the purposes last mentioned. The amount 
to be subtracted on account of business expenses and capital 
from the individual monetary flow is very different among differ- 
ent classes of persons. One whose sole occupation is to work 
for wages or a salary has no payment to subtract. His income 
is the same as the monetary flow to him. The other extreme is 
found in the case of men who transact business on a very large 
scale. They are continually buying and selling, and their 
income may be only a very small fraction of their transactions — 
so small a fraction, in fact, that it may be completely swallowed 
up by an unexpected rise or fall of prices. 

27. The question what payments are to be considered as 
necessary to the continued transaction of business and the pres- 
ervation of capital may be a difficult one in special cases ; but 
the guiding principles may be made quite clear. In estimating 
net income it might be claimed that we should subtract from 
the total receipts of the individual the amount necessary for his 
own sustenance. But this would be wrong in principle, because 
the very object of determining income is to learn how much 
the person can afford to expend on his own sustenance without 



360 THE SOCIETABT CIRCULATION. [IV. 27. 

encroaching upon his reserve of capital or diminishing his 
power to carry on business. Hence we must leave unsubtracted 
all that he expends in improving his capital or increasing his 
business. 

As one example let us take the case of a merchant. At the 
end of a year he finds that he has sold goods to a certain 
amount. The principal items which he has to subtract from 
this amount in order to obtain his income are these : 
' T. The prime cost of the goods he has sold. 

II. Rent of storehouse, insurance, and other expenses at- 
tendant upon the simple preservation of his stock in proper 
condition for sale. 

III. Wages to clerks and others engaged in selling goods or 
transacting his business. 

IV. Stationery, postage, losses from bad debts, and other 
miscellaneous items incident to the transaction of business. 

After subtracting these and any other items necessary to the 
conduct of his business from the sum total of his sales, the 
remainder will represent his net income. 

In the case of a manufacturer the same items will occur with 
some modifications and additions. Instead of the item " prime 
cost of goods sold " he will have the prime cost of all the raw 
material manufactured and sold. He will also have the very 
important item " wear and tear of machinery and other forms 
of fixed capital." This item is necessarily somewhat indefinite. 
If his machinery has been going during the whole year with- 
out any repairs, it must have deteriorated, and the amount of 
deterioration must be estimated as best he can. If he has 
made large improvements in his factory, and paid for them out 
of his profits, such payment should not be subtracted, but 
should be considered as an investment of his surplus income. 

In the case of great changes in price the question will some- 
times arise, "What is to be considered as the measure of the capi- 
tal kept up ? Suppose a merchant to find at the end of the 
year that although the actual stock of goods on hand is nearly 
the same as at the beginning, yet their prime cost is greater, 



IV. 27.] OF INDIVIDUAL INCOME AND EXPENDITURE. 361 

and their cost if purchased now would be double. Is lie to 
consider this increase of value as a profit earned and applied 
so as to double his capital? We reply, Not if the rise in 
prices is the result of a general increase in the scale of prices 
arising from a diminution in the absolute value of the dollar. 
In this case there would be no increase of his actual capital, 
but only an apparent increase arising from his measuring his 
capital by a depreciated standard. If, however, the rise of 
prices is confined to the particular stock of goods he deals in, 
and grows out of some scarcity in the supply, the greater value 
would represent an actual increase of his capital, and might be 
counted as a profit, and therefore as an addition to his income. 

In other cases we have to consider whether an expenditure 
was incident to the transaction of business, or was applied 
to the sustenance of the person or his family. For example, if 
a physician who receives annually $3000 in fees has to pay out 
$500 of this amount on account of a horse and buggy in which 
to visit his patients, his net income is only $2500. But if he 
should visit his patients on foot and employ the horse and 
buggy to give his wife and family a daily airing, we should re- 
gard that expenditure as coming out of his income, and say that 
his net income was $3000. The difference in the two cases is 
that in the one the horse and buggy are supposed to be used for 
business purposes and not for enjoyment, whereas in the other 
they are used for enjoyment. 

Corporate Income. Another difficult case arises when we 
consider the income of companies. The preceding rules 
apply to any legal person. A railway or manufacturing com- 
pany may have its own independent income. Such income, 
in the regular course of business, is supposed to be divided at 
stated times among the shareholders as dividends, and thus to 
become a part of their regular incomes. But very often the 
profits gained by the company, instead of being so divided, are 
employed in increasing the capital or enlarging the business of 
the company. In such a case are the stockholders to be regard- 
ed as in receipt of an income from their shares ? If so, how is 



362 TEE SOCIETARY CIRCULATION. [IV. 28. 

the amount to be determined ? Since they get nothing at all 
from the company, it might seem that the profits of the latter 
should not be reckoned as income to them. On the other hand, 
if they have a right to their prospective share of these profits, 
and this prospective right has a market value, they should be 
considered as in receipt of an income equal to the increase in 
the market value of their shares arising from the increase of 
the capital owned by their company. 

28. Expenditure of Income. The income determined in the 
preceding section is a certain amount of money which the in- 
dividual can expend at his own pleasure without diminishing 
his productive power. There are two distinct ways in which 
he can spend it : 

I. In sustenance for himself, his family and friends. 

II. In increasing the amount of capital which he possesses. 

We have found his net income by subtracting from the to- 
tal monetary flow to him the total payments necessary to the 
transaction of his business and the preservation of his capital. 
The remainder is expended in the two ways just mentioned. 
We have then three great classes of payments made by him, 
namely : 

Payments on account of business and capital ; 

Payments for sustenance ; 

Payments in increase of capital. 

These together make up the total monetary flow from him, 
which is equal to the flow to him, as has already been shown. 
These flows are illustrated in the diagram opposite. From 
society to the merchant goes a flow of currency for the pur- 
chase of goods. From the merchant goes one flow to the 
jobbers who supply his goods, another to his clerks, and an- 
other to capitalists who perhaps own his warehouse or have 
loaned him money. These flows represent what he pays out 
on account of business. The dotted line to producers of 
capital represents that portion of his flow which he expends in 
increasing his capital. He may merely increase his stock of 
goods, and then, so far as he is concerned, the producers of his 



IV. 29.] OF INDIVIDUAL INCOME AND EXPENDITURE. 363 

capital are the jobbers themselves. If he builds a new store 
with his profits, these producers will be bricklayers, carpenters, 
and mechanics. The heavy dotted line represents his pay- 




Fig. 5. 

ments for the sustenance of himself and family. The sum 
total of the five flows from him makes up the single flow from 
society to him. 

29. There are two laws of income which are fundamental in 
economics. In applying the term " law " to these propositions, 
it must not be understood that they are absolutely true, irre- 
spective of the interpretation which may be put upon them. 
They are rather to be regarded as approximations to general 
truths which require, however, to be interpreted in each partic- 
ular case. The first law which we shall consider may be ex- 
pressed in the following form : 

As a general rule the income which an individual gains is 
equal to the value which he adds to the sum total of produc- 
tion through the use of his own faculties and capital. 

There is perhaps no proposition in political economy which 
runs counter to common ideas more than this. It is a familiar 



364 THE SOCIETARY CIRCULATION. [IV. 29. 

fact that the largest incomes are gained by men whose function 
in production appears to the superficial observer quite insig- 
nificant. From the point of view of the average man the labor 
is the sole measure of the product, and the man who without 
labor gets a portion of the product gets it without rendering 
an equivalent service. 

Since the first impulse of the student ought to be to point 
out certain obvious limitations to this law, we may begin by 
considering them. The first question will be what contribution 
to production is made by a man who makes a fortune merely 
through operations in the stock market. The answer is that so 
far as this man's interests are concerned, the case is truly an 
exception. If the operations were merely speculative — that is, 
if there has been no real change in the value of the stock — the 
people with whom he has been dealing have lost an equal 
amount. Therefore the algebraic sum total of the gains of all 
the classes engaged in these speculations will be zero. Now, 
as already pointed out, we are in political economy principally 
concerned with sums total and not merely with the interests of 
this or that individual. Hence this error will not affect the 
sum total. 

Let us suppose, in the second place, that our operator has pur- 
chased a stock supposed to be worthless and, having held it a 
year or two, it has without any effort on his part become of great 
value. This means that it has become useful to mankind while 
he was the owner. In order, therefore, that the law may be 
correctly applied we must include in production all increase of 
value produced by any circumstance whatever, and must credit 
this increase to the owner of the object whose usefulness was 
enhanced. This remark applies to all cases of the ownership 
of land, real estate, machinery, ores, etc., the value of which 
may change without the application of labor, merely through 
the movement of population and the action of supply and de- 
mand. The law must therefore, in order to be correct, be un- 
derstood in some such form as this : The total income of the 
community comprises all the values produced by its labor jplus 



IV. 30.] OF INDIVIDUAL INCOME AND EXPENDITURE. 365 

all the increase in the value of fixed property brought forth 
without labor minus all the decay in value which has occurred. 
Leaving out speculative operations, gambling, etc., which mere- 
ly change the ownership of property, every man's income is then 
the measure of what he adds to the total production. 

The most simple consideration by which the law can be 
illustrated is this : no person can gain income except by selling 
to some other person something which this other person for 
the time being considers to be an equivalent. Take for in- 
stance the case of a railroad manager who is worth many mil- 
lions of dollars. If he has not gained this fortune by knock- 
ing people down and picking their pockets, or by burglary, 
which of course we assume, then he must have gained every 
dollar through some person paying a dollar for his services. 
All his millions have been gained from the millions of people 
who travel on his road and the thousands who purchased its 
stock, and every one of these millions and thousands paid his 
dollars because he thought it advantageous to himself so to 
do. He was either gaining an advantage or saving himself 
from a disadvantage. He either reached his place of business 
betimes in the morning, or he was saved the expense of having 
to stay in the city overnight, or of hiring a carriage to take 
him home. 

30. Second Law of Income. The entire amount paid by 
the purchaser for any commodity may be considered to be 
divided as income among the persons who have been instru- 
mental in the production of that commodity, each man's 
share being his compensation for the labor expended and 
capital employed in such production. 

We may show this most easily by a diagram of the flow 
pertaining to an expenditure of $100 in the purchase of boots. 
Let us suppose that the raw material, principally leather, which 
the shoemaker consumed in making the boots cost $40 ; and 
that he had to pay $20 to an assistant and $.5 to the owner of 



366 



THE SOGIETART CIRCULATION. 



[IV. 30. 



his shop as rent. This would leave $35 as his own income 
from the hoots. 

The payment made to his assistant and shop-owner may, for 
simplicity, be considered as made solely on account of their 

services. In the case of the 
owner the services did not 
merely consist of labor, but 
principally of the interest on 
the capital he had invested 
in the shop. We may, if we 
choose, consider the income 
from capital as a separate 
item, but there is no need of 
our doing it now. 

We have left the $40 
which the shoemaker paid to 
the leather-dealers for raw 
material. This is divided in 
the same way between the 
owner of a shop, the dealer's 
clerks, the tanner from whom 
he purchased his leather, and 
himself. The division which 
we assume is shown on the 
diagram as $3 going to one 
party, $7 to another, and $20 
to the third, while $10 is 
kept as his own income. 

The $20 which he pays the 
tanner is divided according 
to the same system. In each 
class of persons represented 
by the circles is given their portion of the money. Follow- 
ing the flow to the bottom, we see that the division of the 
$100 contributes incomes as follows : 




Fig. 6. 



IV. 30.] OF INDIVIDUAL INCOME AND EXPENDITURE. 367 

To the shoemaker $35 

To the journeyman shoemaker 20 

To the owners of shops 8 

To the leather-dealer 10 

To the leather-dealer's clerks 7 

To the tanner 5 

To the producers of bark 5 

To the tanner's assistant 5 

To the dealer in hides, his clerks, the railway owners, the drovers, and 

the cowboys, each $1, making 5 

Total $100 

An important question may arise at this point. The money 
paid to the purchaser did not divide itself in this way in a con- 
tinuous stream, because the chances are that the shoemaker 
paid the wages and rent, and purchased his leather, before he 
sold his boots. The same thing may be true all the way down 
the diagram, so that we are apparently tracing the process in a 
reverse order. If the boots had all burned up before they 
were purchased, the greater part of the persons represented 
would have received their income. 

But this does not contravene the law laid down. It still 
remains true that the income of the shoemaker is found by 
subtracting the $65 which he had previously paid out from 
the $100 which he received. The same is true all the way 
down, so that the numbers still correctly represent incomes. 

On the other hand, when we consider the future we shall see 
that the money paid by the purchaser of the boots is a very 
necessary part of the future income of all concerned in pro- 
ducing them. The shoemaker cannot keep up his purchase 
of leather or his payments to others unless he can sell his pro- 
ducts. Moreover, as a general rule, so long as he continues 
Ills sales he will continue his purchases. Thus the interdepen- 
dence of the various incomes is a necessary result of the case. 

The following important corollary may be deduced from the 
preceding law : When the price of goods rises, it is certain 
that some one concerned in their production is receiving an in- 
creased income for his services, and vice versa. 



368 TEE SOCIETARY CIRCULATION. [IV. 30. 

The division of this increase of income among the different 
parties concerned is partly a question of interpretation. If, 
next month, the shoemaker gets $120 for the same boots 
which he sold for $100 the present month, we may consider 
that increase of income as confined to himself, because he got 
his leather and employed his help at old prices. But the 
general fact will be that he could not command this increased 
price unless leather became dearer. Therefore in the future 
lie must pay the higher prices, and thus the increased income 
will be divided among most or all of the producers. 

The results of the above two laws may be combined in the 
following conclusions : 

I. Every mass of finished or unfinished products may he 
regarded as the joint work of the various persons whose ser- 
vices were necessary to the production. 

II. The value of all such products in the country may he 
divided among the producers into shares, each share being 
a part of the income of the person who contributes that share 
to the product. 

III. Conversely, we may consider every mail's income to 
represent his contribution to the sum total of the product, and 
to measure his right to take an equal value of the products of 
others from that sum total. 



IV. 31.] DEMAND AS THE DIRECTOR OF INDUSTRY. 369 



CHAPTER VI. 

DEMAND AS THE DIEECTOR OF INDUSTRY. 

31. The members of the community generally believe that 
the public interests are deeply affected by the way in which 
people spend their money. This belief arises from the suppo- 
sition that the spender confers a marked benefit on the person 
from whom he buys. It is supposed that if he spends his 
.money in clothing, tailors are benefited ; if he spends it in 
shoes, shoemakers are benefited ; if he carries it abroad, the 
whole community lose the benefit he might have conferred 
upon it ; if he employs Chinese cheap labor, the Anglo-Saxon 
race are the losers; and if he invests it, nobody but himself gets 
any benefit from it. In what respects these current popular 
doctrines are erroneous will appear subsequently. "We begin 
by considering the question of the effects of different kinds of 
expenditure from an economic point of view, without reference 
to preconceived opinions. The investigation is one of the most 
intricate in economics, and requires for its prosecution that we 
have clearly in mind a number of conclusions already drawn in 
previous chapters. These conclusions we shall now re-state for 
the sake of clearness. 

I. The necessary conditions of general prosperity are that a 
sufficiency of the necessaries of life to support the whole com- 
munity should be produced, and that each member should be 
able to command such portion as he is entitled to under the laws 
which govern the social organism. A sufficiency of a commod- 
ity is all that is required. There is no need of piling up more 
food than the whole communit}' can eat, nor of making more 
clothes than they can wear out. Therefore increasing prosper- 
ity is marked, not by an unlimited increase of the more com- 
mon necessaries of life, but by gradual improvements in the 
24 



370 THE 80CIETARY CIRCULATION. [IV. 31. 

quality of these necessaries, and in the quantity of those arti- 
cles which are commonly considered luxuries. It will of course 
be understood that no line can be drawn between necessaries 
and luxuries. These do not form two classes of things, but the 
quality of being a luxury must be regarded as one which dif- 
ferent objects possess in different degrees. When a man makes 
the first step upward in the social scale, it is not by sleeping 
in two straw beds after having formerly slept in one, but by 
sleeping in a better kind of bed. lie substitutes finer for 
coarser clothing, and a family carriage for a cart. As he ad- 
vances, a silver watch comes into his possession, which, in time, 
is replaced by a gold one. He may have no more chairs than 
he had before, but they are of better quality, and books and 
pictures are added to the embellishments of his house. Lace cur- 
tains take the place of the cotton ones on his windows, and his 
books at last go into a walnut case. The prosperity of any one 
man is improved when he can add comforts possessing in a 
higher degree the quality of luxuries; and any class of men is 
prosperous when all of its members are prosperous. Since, by 
the natural laws of supply and demand, those things are made 
which people most want and can best afford to buy, it follows 
that general prosperity is marked by a general increase in the 
effectiveness of industry, and that we must expect this increase 
of industry to show itself in the production of articles which 
to the lowest grade of men would appear luxuries. 

So much for production in so far as it concerns the ability of 
each man to get command of his share of the product. "We 
have already shown that in the state of things which now exists 
in this country it is scarcely possible for any industrious man 
to suffer for the necessaries of life. The only persons who can 
so suffer are those so weak, miserable, and worthless that they 
cannot or will not do anything which anybody else wants to 
have done, or who set so high a price on their services that 
they can get nobody to employ them. 

II. We call to mind that the primary form of capital may be 
considered as sustenance for laborers ; that is, food for them to 



IV. 31.] DEMAND AS THE DIBECTOR OF INDUSTRY. 371 

eat, clothing for them to wear, and houses for them to live in. 
In an economic sense the class laborer includes every person 
who gains a living by his own exertions, and does not live off 
the interest of his money, or the profits on his investments. 
Clergymen and teachers are therefore included in the class, as 
well as mechanics and hod-carriers. 

"We also call to mind that when the laborer receives money 
in exchange for work done, this money may be regarded as an 
order on owners of sustenance to supply the laborer with a cor- 
responding quantity of that sustenance. This order is ad- 
dressed to the house-owner, who receives it as rent ; to the 
owner of flour, who gives flour in exchange for it ; and to the 
clothier, who gives clothes for it. 

In order that the work of the laborer may be profitable, the 
value of his product, whatever it may be, must exceed the 
value of all the sustenance which he and his family consume. 
The measure of the laborer's prosperity is the quality of the 
sustenance which he is able to command. 

III. The demand for various kinds of commodities fluctuates 
from month to month and from year to } 7 ear. There is there- 
fore a corresponding fluctuation in the industry which pro- 
duces those commodities. It has been shown that these fluctua- 
tions in industry may be represented by supposing laborers who 
are engaged in producing one class of goods to change their oc- 
cupation and produce the other class. This change can be ef- 
fected either directly, by laborers changing their occupation, or 
indirectly, by employing more new labor in the new occupation. 
The result is the same in the two cases (as shown in II. 49). 
The restrictions to which this change of industry is subject have 
also been pointed out, and it has been shown that the only case 
in which any difficulty is met with in effecting the change of 
employment arises when a higher order of skill is demanded.- 

IV. It is also necessary that the reader should have clearly 
in mind the monetary circulation as described in the last two 
chapters, and the distinction between the current measure of de- 
mand and the absolute measure. The main proposition to be 



372 THE SOCIETARY CIRCULATION. [IV. 32. 

had in mind in this connection is that demand depends upon 
the ratio between the flow of the circulation and the price 
asked ; that when the flow diminishes, either through a dimi- 
nution of the volume of currency, or, what amounts to the 
same thing, through a diminution of its rapidity of circulation, 
a general falling off in the demand for commodities in general 
is a necessary result ; also that this falling off has its natural 
remedy in a corresponding diminution in the general scale of 
prices,, which will immediately restore the demand without any 
general change in the ability of different classes of men to com- 
mand the means of subsistence. 

32. If in the monetary circulation we consider a payment 
from one person A to another person B, we may inquire what B 
does with the identical money he thus receives, and may, in im- 
agination, trace it through the different streams passing from B 
to other members of the community. From each member the 
stream will subdivide itself amongst other members, and so on 
indefinitely, but its total magnitude will remain unchanged-. 
For example, we may imagine that a sum of five dollars being 
paid to B, he pays one dollar of it to each of five persons. If 
each of these persons divides it among four other persons, there 
will be twenty in all who will each receive twenty-five cents 
of that money. If each of these twenty persons divide the 
money among five others, we shall have one hundred persons 
each receiving five cents. In every case the total volume of 
all the little streams which we consider amounts constantly 
to five dollars. Of course in practice the division would be 
unequal, but this would not affect the result when we add up 
all the payments. 

It may be asked, How shall we distinguish this particular five 
dollars from all the other money flowing from B ? The latter 
was perhaps in receipt of hundreds of dollars from other par- 
ties ; he puts the five dollars he receives from A into his gen- 
eral fund, and thus mixes it up in such a way that we cannot 
distinguish between this particular sum and the other money. 



IV. 32.] DEMAND AS THE DIRECTOR OF INDUSTRY. 373 

The answer to this is that we learn what B does with that par- 
ticular five dollars by inquiring in what streams the deficiency 
would have been found had he not received that five dollars 
from A. It is mathematically certain that if he had not re- 
ceived it be would have had that much the less to pay out to 
others ; so that, taking all his payees together, it is certain that 
five dollars more are received than would have been received 
by them had A not made this payment. What is true of these 
payees is true of their payees ; there is a deficiency in the 
stream amounting to this sum, how far soever we trace it. 

Having thus considered tbe effects of cutting off this stream, 
so far as it concerns those to whom it would have flowed had 
it not been cut off, let us consider the consequence in another 
direction. If A bad not made that payment to B he would 
have had five dollars more either to keep or to spend for some 
other purpose. Let us first consider the case in which he 
spends it in some other way. Then his flow to some third 
person, C for example, would have been increased by the same 
amount that his flow to B is diminished. He pays either to B 
or to C, but not to both. We may in imagination trace the pay- 
ment from A through C and then see it subdivided amongst 
different classes of persons in the same way that we did when 
it went through B. 

The conception that we must now form is this : We imagine 
A holding his five dollars and deliberating whether he shall 
issue it to B or to C. Whichever of the two he decides shall 
receive it, we may trace it from the receiver as it subdivides 
itself among other members of the community. We may sup- 
pose it, after two or three payments, to be subdivided among 
the same persons, whether paid to B or to C. After it reaches 
those same persons the effects will be the same. Any economic 
difference that may result from the two directions will take 
place while the streams are divided, and before they join by 
reaching the same parties. This conception of the stream ulti- 
mately reaching the same persons in whichever way paid is 
introduced for simplicity. As a matter of fact and reason, 



374 THE SOCIETARY CIRCULATION. [IV. 33. 

when divided among so many men that each one's share is in- 
considerable, we may consider it as having reached the same 
persons. 

33. Purchase of Commodities and Demand for Labor. 
In all that precedes we have made no classification of pay- 
ments according to their object. A distinction is, however, 
made by economists between payments to laborers for their 
services and payments for commodities already produced. 
The ground of this distinction is this : the capital with which 
commodities are produced is not the money received for sell- 
ing them, but the sustenance which the laborers consumed 
while making them. Hence the payments which support 
labor are not those made to the seller of goods, but those 
made to laborers to enable them to purchase sustenance. If, 
then, we consider only the latter class of payments, we must 
follow the stream of currency through the parties who sell 
goods until we find it to reach laborers who receive it as wages 
and who purchase sustenance with it. 

This is what we have done in the preceding chapter, where 
we have shown that every payment for goods purchased may 
be considered as divided as wages and interest among those 
instrumental in their production. 

Let us now return to the question how we may suppose a 
payment from A to B to be divided by the latter amongst his 
employes with a view of finding what laborer it reaches. It 
is an obvious rule of business that if a manufacturer finds he 
cannot sell a particular class of goods, he stops making those 
goods. If he finds goods sell well, he spends the money which 
he receives for them in helping his operatives to replace the 
stock which is sold out. Since manufacturers will not allow 
unsold goods to accumulate without limit, and indeed will 
make none except what they can sell, we may consider every 
person who purchases goods of any particular class as placing in 
the manufacturer's hands the power and inducement to replace 
these goods by employing men to make a fresh supply of them. 



IV. 31] DEMAND AS TEE DIRECTOR OF INDUSTRY. 375 

34. We now reach the following fundamental law of em- 
ployment : A change of demand from one commodity to 
another may always be met by a corresponding change of labor 
from the production of the one commodity to that of the other 
i?i so far as this change is possible. 

The way in which the change is brought about, and the condi- 
tions to which it is subject, have been set forth in II. 49, 50. 
Let A be an agent who has money to spend, M a shoemaker, 
and T a tailor. Also let S be the collection of the individuals 
from whom the tailors and shoemakers may purchase their sup- 
plies. Then if the agent purchases from the tailors, the latter 
will spend the money so received for food, clothing, and other 
necessaries, as well as for the means of continuing their busi- 
ness. This expenditure is repeated by a continuation of the 
stream from M to S. S representing the community in general. 
But suppose the spender, instead of purchasing clothes, pur- 
chases .shoes. Then his money, instead of going to the tailor T, 
will go to the shoemaker M. If now the equilibrium of supply 
and demand was exact when the purchase was made from the 
tailor, then the result of buying from the shoemaker will be 
that a certain amount of tailoring industry is left out of em- 
ployment, while there is a demand for an additional supply of 
the labor of shoemakers. To fix the idea, let us suppose that A 
represents a number of persons such that the demand in ques- 
tion will be represented by the services of a single person. If 
then a single tailor can change his business to that of making 
shoes, he Avill receive the same money as before, and will spend 
most of it among the same people as before. The supply and 
demand will then be perfectly equalized, and the monetary 
circulation among all the people of the community will be the 
same as before. What A has done has been to change the in- 
dustry of one man from that of shoemaking to that of making 
clothes. 

We have already shown how and under what conditions this 
change can be brought about. We call to mind that there is 
no necessity that any individual tailor should change his occu- 



376 



TIIE SOCIETARY CIRCULATION: 



[IV. 34. 



pation for that of a shoemaker. Some third person may have 
adopted the trade of shoemaker, and the tailor may take his 
place, or there may be a series of changes, as already explained 
in treating of changes of occupation. Finally, some tailor may 
die and the person who otherwise would have filled his place 
may learn to make shoes. But in whatever way the change 
comes about, the final result will be the same as if some one 
tailor had changed his occupation to that of a shoemaker. 
The effect of this change of expenditure is shown in the dia- 
gram, which now includes not merely 
a single flow, as our former diagrams 
have, but two alternate flows. On 
the right hand the accented letters 
represent the .flows which formerly 
went through the tailors. From the 
agent A went the flow a' to the tail- 
ors, among whom of course we in- 
clude the merchants who sold the 
clothes. This flow subdivides itself 
into two, V and c\ the former being 
the payment for the subsistence of 
the tailors, and the latter that portion 
of the payment which went to the 
parties who supplied the cloth and 
the wool. These parties got the wool 
from certain sheep-raisers, and the 
flow d' represents the payment to 
them. 

Now when A ceases to buy these particular clothes, the 
latter flows all stop. In lieu of a' we have an equal flow a 
going to the shoemakers. We therefore suppose a passage of 
certain men from the ranks of the tailors to those of the shoe- 
makers. To show that this passage may be indirect, we draw 
a blank circle between them, which may be considered as rep- 
resenting the community at large, or that portion of the com- 
munity which is looking for something to do. The unemployed 




Fig. 



IV. 35.] DEMAND AS THE DIRECTOR OF INDUSTRY. 377 

tailors pass into that class, and the shoemakers pass out of it, so. 
that it remains unchanged in number. 

, Since shoemakers consume the same subsistence as tailors, the 
flow b for that subsistence is the same as the flow b', so that the 
interests of society at large are unaffected. In lieu of the flow 
c to the cloth and wool-dealers, we have a flow c to the leather- 
makers. Therefore there must be a change from the business 
of dealing in wool to that of making or dealing in leather. 

In lieu of the flow df to the sheep-raisers, we have the flow 
d to the cattle-raisers. It is as easy to raise cattle as sheep, and 
the balance is made good by a sufficient number of cattle being 
substituted for sheep. > 

The point mainly to be kept in mind is that the totality of; 
demand is unchanged by the change of expenditure. There is' 
a greater demand for those classes of services or commodities 
on the left side of the diagram, and a less demand for those on 
the right side. The compensation is effected by the passage of 
a limited number of men from those on the right to those on 
the left, and the interests of society at large remain unchanged. 

35. Case of Non-competing Groups. The question may 
arise, What would be the effect if , the change of expenditure 
by A, instead of being directed to commodities made by the 
same classes of men as before, should be directed to those 
made by a non-competing group whose ranks tailors could 
not join? Suppose, for example, that in lieu of shoemakers 
the parties employed were professors of Sanscrit and Hebrew. 
Not only could the tailors never learn to teach Sanscrit or He- 
brew, but it is not likely that there could be any relation by 
which the tailor should take any place occupied by such a 
teacher in the blank circle. The result would be a general 
falling off in the demand for the work of tailors, and an in- 
crease in the demand for professors of Sanscrit. 

It may appear that since the professors of Sanscrit must be 
clothed, there will be a flow from them to the tailors to com- 
pensate for the loss of the flow from A. But examination will 



378 THE SOCIETABT CIRCULATION. [IV. 36. 

show us that such is not the case. The professors of Sanscrit 
must have been clad before, and will need few or no more 
clothes after their change of employment than they did before. 
Moreover, their entire income is, by hypothesis, taken out of 
the flow which formerly went to the tailors, and under any 
circumstances they spend but a small fraction of that income 
for clothes. There is therefore an actual increase in the de- 
mand for the labor of teaching Sanscrit, and a diminished 
demand for that of making clothes, which, so far as this par- 
ticular operation is concerned, cannot be compensated. 

To learn the complete effect of the change upon society we 
ought to know what the professors were doing before A 
employed them. They probably left some other employer, E, 
and thus the flow to them from E was stopped, to be replaced 
by the flow from A. If, after the change, this flow from 
E should pass to tailors, shoemakers, etc., the compensation 
would be complete, the only change being that the professors 
of Sanscrit would now be paid out of a new flow. But this 
would be really no change at all, so far as the interests . of 
classes are concerned, but only an interchange of two flows. 
What we are considering, however, is not a change of this 
sort, but an actual change by A from demanding clothes to 
demanding the teaching of Sanscrit, uncompensated by any 
reverse change by other people. The undoubted result is that 
already set forth. So far as immediate income is concerned, 
one class is better and another worse off. There are indeed 
ulterior effects, but these are to be considered in subsequent 
chapters. 

36. Other Forms of Expenditure. We have been compar- 
ing the effects of different modes of expenditure, and we have 
shown that the sum total of the demand for labor is the same 
whether one spends his money for one kind of labor or suste- 
nance or another kind. But there are still two cases to be con- 
sidered. What will the effect be — 

1. When A, instead of spending his money by demanding 



IV. 36.] DEM AS D AS TEE DIRECTOR OF INDUSTRY. 379 

services from the social organism to which he belongs, sends it 
abroad, or melts it into jewelry ; that is, when he simply stops 
the flow a from himself, and so employs nobody in place of 
the tailors ? 

2. When, instead of spending, he invests it in some form of 
capital ? 

The modifications in our conclusions when the act of demand 
is thus modified will form the subject of the next three chap- 
ters. 

EXERCISES. 

1. Draw diagrams showing the effects of the following changes of ex- 
penditure, and the corresponding changes of labor. Show also, in each 
case, whether the change can be made without disadvantage. 

1. A man who has been collecting a library stops buying books and 
spends the same income in building houses. 

II. The inhabitants of a city who have been getting their streets graded 
and paved stop that expenditure and spend the same income upon the 
erection of a city hall. 

III. A body of men who have been clothing themselves expensively 
stop buying new clothes and expend the money thus saved in giving din- 
ners to their friends. 

IV. A body of men in New York stop building railways and invest the 
income thus saved in building iron ships. 

V. A man who has been spending his income in keeping an expensive 
house bequeaths his property to a college. 

2. After the burning of Chicago what classes of men probably left the 
city, and what classes went thither to find profitable employment? 

3. If the government of New York State had never undertaken the 
building of the new capitol at Albany, in what way would the demand 
for labor have been different from what it is? 

4. When a government borrows money from a body of capitalists who 
have been building railways, and expends it in war, what change in the 
occupation of men does it bring about? 

5. When the State of Virginia borrowed money from citizens of New 
York, and spent it in internal improvements, what change in occupation 
and what movement of population was brought about? 



380 TEE SOCIETARY CIRCULATION. [IV. 37. 



CHAPTEK VII. 

EFFECT OF A DIMINUTION IN THE FLOW OF THE CURRENCY. 

37. Our answer to the question what will happen in case of 
a withdrawal of currency from the regular now, and a conse- 
quent diminution of that flow, depends upon principles which 
have already been developed in the preceding chapters. But 
it will conduce to clearness to combine these principles in a new 
form and apply the result to this special question. The imme- 
diate effect is very obvious, and is correctly apprehended by 
the business public. The ulterior effect is not so obvious, but 
is capable of being made clear to any mind capable of grasping 
the problem. 

The immediate effect of the withdrawal must be a diminu- 
tion of the industrial as well as of the monetary flow. Let us 
once more revert to the hypothesis of Fig. 7. The consumers 
A were there supposed to have been spending their money for 
clothes, thus causing an industrial flow along the lines d\ c', V, 
and a' from sheep-raisers and wool-dealers, etc., through tailors 
terminating in the men A. It was shown in the last chapter 
how the change of A's expenditure from clothes to shoes now 
causes the industrial flow to pass along the veins d, c, b, a, but 
without causing any diminution in the demand for employ- 
ment. !Now it is very evident that if A does not spend his 
money in either of these directions, nor in any third direction 
which will cause a demand for the products of the community, 
that particular branch of the industrial flow shown on the dia- 
gram will entirely stop. This will be the case if he sends 
his money abroad, melts it into jewelry, or deposits it in a 
bank which does not loan it out to its customers. Hence the 
tailors, shoemakers, and producers of subsistence in general 



IV. 37.] DIMINUTION IN THE FLOW OF TEE CURRENCY. 381 

naturally oppose this policy on the part of A, and desire that 
he shall not only spend his money, but spend it at home. 

Now if the money prices of all commodities or services were 
fixed by any law whatever, whether a legislative enactment or 
a provision of nature, then this diminution of the industrial 
flow would be not only the immediate but the permanent re- 
sult of every diminution in the flow of the currency. But such 
is not the case. The ulterior effect is that the industrial flow 
is restored as soon as prices can accommodate themselves to the 
new state of things. To see this we must first remark that 
there is no law which prescribes how great a monetary flow is 
required to measure or equal the industrial flow. This depends 
altogether upon the scale of prices. When in the equation of 
the industrial flow, 

K X P = V X R, 

we have a diminution in Y, it may at any time be compensated 
by a corresponding diminution in P, without changing the 
actual industrial flow K. Moreover, this operation of dimin- 
ishing P, so as to keep up the equation, is nothing more than 
that of accommodating prices to demand, as we have already 
shown. 

If then we suppose that the change of expenditure by A 
was equivalent to one per centum of the total expenditure of 
the entire community, it would follow that one per centum of 
the industrial population would be thrown out of employment 
so long as the scale of prices remained the same as before. If 
this one per centum were composed wholly of tailors, that class 
alone would be immediately affected. Finding this diminution 
ill the demand for their labor, some of them would have to sub- 
mit to a reduction of one per cent in their wages, while others 
would seek for other employments. This competition for work 
would cause a fall in prices, and the reduction in price would 
cause an increase of demand. Thus, as soon as the equilibrium 
was restored, everything would go on as before, except in the 
following points : 



382 THE SOCIETART CIRCULATION. [IV. 38. 

1. There would be fewer tailors in proportion to the rest of 
the community. 

2. Wages would be one per cent lower. 

3. Goods would be one per cent cheaper. 

Thus everything would go on in its regular normal way, only 
on a scale of prices one per cent lower. No one except A would 
in reality be either better or worse off. We may assume that 
A would be a little better off, because he bought, instead of 
clothing, something which he must have wanted more than he 
did clothes. 

In tracing this effect of the withdrawal of the circulation we 
have supposed the withdrawal to be permanent. But in most 
cases the circulation will be restored through the action of 
causes brought into play by the very act of withdrawal. For 
example, if a portion of the volume of currency is sent abroad, 
that very act, if it diminishes home and raises foreign prices, 
will lead to a demand for our goods from abroad, and thus re- 
sult in sending back the money. The more money the owner 
deposits in a bank the more the bank will have to loan. Hence 
the general rule will be that the volume of currency cannot be 
so diminished by bank deposits as to cause a great rise of prices. 
When prices begin to fall, that very fact will cause men to seek 
for money in order to buy, and thus will arise a tendency on 
the part of the owners of bullion to get it coined into money, 
and on the part of business men to borrow from their banks. 

38. The question may arise whether, after all, we are not 
here dealing with a general and serious evil in that we are sup- 
posing a change of occupation on the part of men and a change 
in prices of goods, neither of which can take place without loss 
and friction. This would be true if there were any system on 
which we could accurately adjust prices and demand, so that 
everybody should know exactly what occupation to engage in, 
and pursue that occupation all his life, and if the change con- 
sisted in a disturbance of this adjustment. But such is not the 
case. As a matter of fact, changes of the kind we have sup- 



IV. 39.] DIMINUTION IN TEE FLOW OF TEE CURRENCY. 383 

posed are going on all the time as an inevitable result of the con- 
tinual change in population and tastes, of old men dying off and 
new ones coming on the stage, of new modes of production be- 
in£ discovered and new wants arising. Laborers of all classes 
are continually making changes by demanding higher wages or 
better terms of labor from their employers, and every change 
of this sort is necessarily accompanied by change of demand. 
Prices of every sort are therefore always varying so as to ac- 
commodate themselves to these changing circumstances. It is 
perfectly conceivable that the change made by A in his mode 
of expenditure would be compensated by a change in the oppo- 
site direction by some one else, or by tailors getting dissatisfied 
and going into other employments of their own accord before 
A changed his demand. In this case A's change, instead of 
resulting in the necessity of a new adjustment of prices and 
wages, might obviate the necessity of an adjustment due to 
some other cause. 

Moreover, we have supposed A's cessation of demand to be 
for clothing alone, and thus thrown the whole burden of the 
change on the tailors. But this is an extreme case. The chances 
are that the demand falls off equally from nearly all classes of 
products, and that the compensation is effected without any 
material change of occupation. • 

39. The above conclusion is subject to one important tem- 
porary exception. Although the wholesale prices of commodi- 
ties rapidly adjust themselves to variations in the monetary flow, 
there are certain classes of services in which the adjustment 
takes place Yevy slowly and is impeded by various causes. The 
salaries of government officers can be changed only by legisla- 
tion, and therefore do not respond to changes of demand. The 
salaries of employes generally are to a certain extent subject 
to the same rule. They are fixed by agreement or custom, and 
can be changed only after the pressure has become so serious as 
to derange the business of employers. The same thing is true 
of most retail prices. It has been shown in a preceding chapter 



384 THE SOCIET ART CIRCULATION. [IV. 39. 

why they do not respond rapidly to changes in the market. 
No one expects the prices of dishes on Delmonico's table to 
rise and fall with the market prices of cattle and flour. Al- 
though it is undoubtedly true that in the long-run a permanent 
change would produce its effect, even at Delmonico's, unless 
some other cause intervened to prevent it, yet this would not be 
true immediately. 

This resistance to change modifies in an important degree 
the effect which we have described, and renders it much more 
injurious to certain classes. What we have conclusively shown 
is, firstly, that in the case of a diminution in the monetary flow 
this diminution tends to divide itself in equal proportions in 
ail the channels of flow; secondly, that there is also a ten- 
dency to cause a uniform fall of prices ; and thirdly, that 
when these tendencies have full play, no one except debtors 
and creditors are either worse or better off. 

But suppose that there are certain channels in which the 
sellers of services or commodities are able to demand the same 
price as before ; that is, to keep up the same monetary flow as 
before through the channels which lead to themselves. The 
inevitable result will be that the flow into other channels will 
be diminished in an undue proportion, and that other persons 
must in consequence suffer. To fix the ideas, let us suppose 
that the persons who can thus command a constant flow to 
themselves form one half of the community, and that there is a 
diminution in the total flow%of 10 per cent. Let us call A the 
half of the community who possess this ability to keep up the 
flow, and B the other half. The result will be that class 
A will command the same prices for all their goods and ser- 
vices as before, while class B will find a diminution of 20 
per cent in the flow to them. Then class A will actually gain, 
by being able to purchase more cheaply all the goods which 
class B have to furnish, while class B will lose to the same 
extent. In the present state of human nature, class B are 
not going to submit immediately to this discrimination against 
them ; they therefore determine that they will remain idle 



IY. 39.] DIMINUTION IN THE FLOW OF TEE CURRENCY. 385 

rather than submit to selling their goods or services at so low a 
rate. The result will be that their prices as well as those of 
class A will be kept up, and thus there will be a diminished 
industrial flow from them corresponding to the diminished 
monetary flow to them. In short, to take the case just sup- 
posed, 20 per cent of them will be idle, or perhaps all of them 
will be idle 20 per cent of their time. Supposing the former 
case to occur, as it commonly will, the result will be that the 
80 per cent of class B who remain at work will be in the same 
position as class A. Thus we shall have 90 per cent of the 
population at work on the old scale of prices, and 10 per cent 
idle, and looking for a living as best they can get it. 

Such is the familiar case presented to us in what are com- 
monly known as " hard times." The real trouble in such cases 
is that wages and prices are higher than they should be to cor- 
respond to the monetary flow. Were there any power which 
could by its own fiat diminish all prices ten per cent, that act 
would operate exactly like taking the load off a wheel when 
the driving force became insufficient to turn it. The wheel 
would immediately commence turning again. 

In order that such a fiat should be effective it would have to 
include not only a scaling down of prices and wages, but of 
debts. The payment of a debt is an integral portion of the 
monetary flow ; but it is a portion which cannot be diminished 
in response to a general diminution in the flow, except through 
the disaster of bankruptcy on the part of the debtor. The re- 
sult is that when the general flow of currency diminishes, the 
intensity of its effect is exaggerated, not only because there are 
such large classes of men who cannot command the same prices 
as before, but because in every mercantile community large 
payments of debts are always due. This is why a commercial 
panic is first felt at the monetary centres, where business is 
conducted and debts are incurred on a large scale, and why in 
case of such a panic the obstruction to current business is pro- 
portionally greater than the diminution of the total monetary 

flow. 

25 



386 THE SOCIETARY CIRCULATION. [IV. 40. 

4:0. Since there is no power which can possibly issue or en- 
force such a fiat, or make any regulations respecting prices, it 
follows that the only available way of avoiding the evils just 
described would be to make the monetary flow correspond to 
the variations of price. Were this practicable, the method of 
doing it would belong to a separate portion of the present work, 
since it would be a practical application of economical princi- 
ples, and not a branch of the science. But we may dispose of 
the subject by showing what kind of difficulties surround it. 
What we want is an accordance between the two quantities, 
scale of prices and flow of currency. Now suppose that the 
government or banks of the country could, by the issue of 
credits or paper money, make the flow of currency what it 
pleased. If prices were fixed by law, there would then be no 
difficulty in keeping up the equation. But, as a matter of fact, 
every man is at liberty to set what price he pleases on his 
goods and services. It would therefore be impossible for the 
government to keep up the equality. The result of an at- 
tempt to do so would be a continuous increase in the volume 
of the currency to correspond to the continually increasing 
prices which everybody would be putting upon their contribu- 
tions to the industrial flow. 

In this connection it must be remarked that we have in 
all the preceding discussions supposed the disturbance to begin 
with a diminution of the monetary flow. But the student 
of the subject should never forget that the real evil is not 
merely this diminution of the flow, but the lack of corre- 
spondence between the flow and the scale of prices which thus 
arises. The very same trouble will arise if prices are made 
higher while the flow remains unaltered. Now, efforts to in- 
crease prices or wages are constantly being made on every 
hand, and no power can prevent them. Let us suppose all the 
operations of industry to be going on in the normal way already 
described, everybody being employed on terms which are satis- 
factory for the time being. As human nature is, we may be 
sure that this satisfaction will not continue. Some class of men, 



IV. 40.] DIMINUTION IN THE FLOW OF TEE CURRENCY. 387 

the builders of houses for example, will be sure to demand 
higher wages. Let us suppose that they command them ; the 
result will be an increase in the flow of the currency to the 
builders of houses which must come out of the pockets of their 
employers. Hence there will be a less flow from these em- 
ployers to other people. The success of the house-builders 
will encourage other classes of laborers to demand higher 
wages. This demand will come at the very moment when, in 
consequence of the success of the house-builders, there will be 
an inability on the part of the public to pay even the same 
wages as before. The probable result will be a more or less 
prolonged strike, which, even if it succeeds, will lead to some 
classes being left out of employment. That is, we shall have 
the very same effects as would have resulted from a with- 
drawal of currency. 



388 THE SOCIETART CIRCULATION. [IV. 41. 



CHAPTER VIII. 

EFFECT OF LABOR-SAVING IMPROVEMENTS IN PRODUCTION. 

41. Every person familiar with industrial operations is 
aware of the contests which so often arise between artisans and 
the introducers of labor-saving processes. These contests are 
being continually waged in one shape or another. The general 
rule is that whenever o, machine is introduced for making w T hat 
was before made by hand, the workman opposes its introduction 
by every means in his power. The opposition is based on the 
very obvious ground that if the introduction of the machine is 
permitted, it will deprive a part or the whole of the workmen 
of their employment. For example, the number of boots and 
shoes which the people of a country wear will not be greatly 
increased by a reduction in their price. Consequently, if a 
machine is introduced which, under the guidance of one man, 
will do the work of twenty shoemakers, a falling off in the de- 
mand for the labor of shoemakers is inevitable. 

The history of this subject shows one feature which does not 
receive the attention it deserves. In this contest between the 
artisan and the machine, the latter has been continually victo- 
rious for a hundred years. Class after class of men have seen 
a large part of their emploj^ment taken from them by ma- 
chinery, so that at the present time there is scarcely any de- 
mand for the labor which millions of men had to perform a 
century ago. And yet, in spite of this, the laborer gets higher 
wages than he did a century ago, and is as fully employed as he 
ever was. His victor, instead of crushing him, has benefited 
him. In the whole history of the contest we do not find a case 
of a general and permanent fall of wages from the introduc- 
tion of machinery. 



IV. 41.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 389 

The principles laid down in the preceding chapters enable 
us readily to account for this. Let us take for example the 
hypothetical case of a shoe-machine. Suppose a machine to be 
so perfect that it really makes shoes of every kind and quality 
for almost nothing, so that after its introduction there is abso- 
lutely no demand for the labor of the shoemaker. To fix the 
ideas, let us suppose that the average flow from the rest of the 
community to the shoemakers is $5 from each person. Let us 
also suppose, to make the case as extreme as possible, that the 
cost of the machine-work is practically nothing, so that every 
man's shoes on the average cost him $5 less per year. What 
is the consequence ? An obvious consequence is that there is 
no longer any demand for the labor of shoemakers. A conse- 
quence less obvious is that every man has $5 more to expend 
in some other direction. As already shown, he can only expend 
this $5 by directly or indirectly demanding that amount of 
labor or its products. Hence arises an increase in the demand 
for other kinds of labor exactly equal to the diminution in the 
demand for shoemakers. The equilibrium is completely re- 
stored by the class of men who are engaged in making shoes 
employing themselves in the kind of labor for which there is 
an increased demand. "When this change is completed every 
one will be as fully employed as before, and every one will 
enjoy the advantage of cheaper shoes. 

We may readily apply the principle here illustrated to the 
actual historical facts. The introduction of machinery during 
the last hundred years has to a certain extent changed the di- 
rection of men's occupations. Instead of making things with 
their own hands, as they formerly had to do, they are now 
manao-ino; machines or assistina; in various ways in working them. 
The pin-makers are no longer at work ; a few of them are feed- 
ing a pin-making machine, but the majority have learned other 
employments. A large class of carpenters no longer push the 
plane ; a portion of them feed the planing-machine, and the 
remainder are fully occupied in executing work with that in- 
creased refinement which increased demand has encouraged. 



390 THE SOCIETART CIRCULATION. [IV. 42. 

The same change may be traced all through the channels of 
industry. The general rule which we may lay down is this : 

JVb operation of cheapening production can cause a dimi- 
nution in the sum total of the demand for labor. Every dimi- 
nution which it may cause in one direction is compensated by 
an increased demand in some other direction. 

4l2. Effect of Improvements in Production %ipon Different 
Classes. In the preceding discussion we have been principally 
concerned with sums total as affecting the prosperity of men 
in general, but we have not considered the effects of improve- 
ments in production upon special classes. Our general conclu- 
sion has been that, taking society at large, there has been a 
general improvement in the ability of men to command the 
necessaries and luxuries of life with a given amount of labor. 
We have also shown that the demand for labor in general can- 
not be said to vary from generation to generation, because it 
adapts itself to the varying conditions which come into play 
from time to time. When the flow of currency increases, the 
demand for labor increases. Higher wages then can and will 
be commanded ; but with these higher wages come higher 
prices, so that if the conditions of production are unchanged, 
the power on the part of the laborer to command the necessa- 
ries of life is unchanged. When we measure demand, not by 
money, but by commodities, then improvements in production 
give rise to increased demand, which is met by wages becoming 
higher when measured by the necessaries of life, though they 
may not be higher in money. 

Thus each class of men is affected by changes in production 
in two ways — (1) by changes in its money wages, and (2) by 
changes in the price of the sustenance which it consumes. 

The question which now arises is this : From the fact that 
the demand by the community at large for labor in general re- 
mains unaltered through all variations in production, does it 
follow that the benefit of these improvements extends to all 
classes? Does it follow that the shoemakers just spoken of 



IV. 43.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 391 

can do what the savers of money want done? We reply that it 
does not so follow by virtue of any general or necessary princi- 
ple. To get the advantage of improvements in production the 
laborer may have to accommodate himself to new conditions, 
and if he cannot do this he may be as badly off as before, if 
not worse. The question whether he can so accommodate him- 
self is one of mere fact to be settled, not by deductive reason- 
ing, but by an appeal to the history of economic phenomena, 
and by an examination of the ways in which the laborer must 
accommodate himself to the new conditions. What we can say 
with certainty is that, the total demand for labor being unal- 
tered, it follows that if there is a less demand for one kind of 
labor, there will be a greater demand for some other kind, and 
vice versa. Hence, if the laborers of any one class do not reap 
any benefit, there is so much the greater benefit to be reaped 
by those of some other class. This brings us to the main ques- 
tion ; that is, the power of laborers to pass from one kind of 
work to another. To consider this question intelligently the 
reader must have clearly in mind the conditions of this trans- 
fer of labor between competing and non-competing groups, as 
already developed (II. 50). 

43. Let us begin with the case of shoemakers. Suppose that 
by means of machinery the amount of labor necessary to the 
production of a pair of boots or shoes is suddenly reduced to 
one half. If the community wear no more shoes than before, 
then one half of the shoemakers must find some new employ- 
ment. We have already shown that in such a case people who 
wear boots and shoes will have the amount of money saved by 
the improvement to spend for other commodities ; and if the 
shoemakers who are thrown out of employment can make 
these commodities, then they will command the same wages as 
before, and will, in common with the rest of the communit}^, 
reap the advantage of having cheaper shoes. But if they can 
do absolutely nothing but make shoes, they would be com- 
pelled to suffer distress. 



392 THE SOCIETART CIRCULATION. [IV. 43. 

To see whether any such state of things is probable, we re- 
call that the supposition we have made, namely, a sudden 
reduction of one half in the cost of making shoes, is an extreme 
one. As a general rule the improvement is gradual, and the 
transfer of labor from shoemakin^ to other branches is brought 
about, not by men changing their employment under compul- 
sion, but by people who under the old system would have 
learned to make shoes learning to do something else on the 
new system. The distress therefore could arise in the way we 
have pointed out only by a class of men being born who could 
never learn to do anything but make shoes. As a matter of 
fact no such men are ever born. There are a large number of 
mechanical trades requiring the same order of natural skill as 
making shoes, which men who would otherwise become shoe- 
makers can readily learn. 

The question then takes the form whether the members of 
the community would spend the money saved in their shoes in 
the demand for products requiring the same skill as shoemak- 
ing. Let us for clearness suppose the community divided into 
three classes, unskilled laborers, skilled laborers, and intellectual 
laborers. Let us also suppose that every man who is born can 
find a place in one of these classes, and in only one. We also 
suppose that in each class he can learn to follow any pursuit 
which he may select. Then if the community spends the 
money saved on shoes in demanding products of unskilled la- 
bor, the class of unskilled laborers will be the people most 
benefited, because they will have higher wages and cheaper 
shoes at the same time. The class of skilled laborers would 
gain by having cheaper shoes, but lose by having lower wages. 
We cannot say whether the advantage or disdvantage would be 
the greater in this case. The demand for intellectual labor would 
not be altered ; but the educated class also would gain by having 
cheaper shoes. The general result would be that unskilled labor 
would gain doubly ; intellectual labor would gain singly ; skilled 
labor might either gain or lose. The average result to the com- 
munity at large would be a gain equal to the saving on shoes. 



IV. 44.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 393 

If the money saved on shoes was expended in the products 
of other skilled labor of the same order as shoemaking, then 
the balance would be completely preserved, and all classes 
would command the same wages as before, but would gain by 
having cheaper shoes. Finally, if the increased demand was in 
the direction of intellectual labor, the result would be of the 
same general nature as when the demand was for unskilled la- 
bor. Intellectual laborers would gain doubly by having higher 
wages and getting cheaper shoes; unskilled laborers would 
gain singly by having cheaper shoes with the same wages; 
while the class of skilled laborers would gain in one direction 
and lose in another. 

44. The question whether all classes are equally benefited 
therefore turns upon whether, when machinery, knowledge, 
and methods of production are improved, the general order 
of skill required in production is increased or diminished. 
This, I say, is the form which the historical question takes. It 
is one to be answered by a comprehensive examination of the 
requirements of modern machinery and labor. The result 
would probably be that a lower order of some qualities and a 
higher order of others is required. It is probable that less 
natural skill of a rare kind is required when goods are made 
by machinery. So far as this is true, the introduction of 
machinery is doubly beneficial to the day-laborer by securing 
him a higher order of employment and cheaper necessaries of 
life at the same time. It is also true that the management of 
the machine may require moral characteristics — industry, sobri- 
ety, steadiness, honesty, and reliability — of a higher degree than 
ordinary irresponsible labor. If so, the laborer who does not 
possess these qualities would again be at a relative disadvantage 
in consequence of improvements in production. That is to 
say, he would lose by lower wages and gain by cheaper pro- 
ducts, and the loss might exceed the gain. We may lay it 
down as a general rule that the idle, dissipated, and unreliable 
classes will be in about the same low state, no matter how 



394 THE SOCIETARY CIRCULATION, [IV. 45. 

far society advances. Even philanthropists could do nothing 
for them, unless it could do away with them in the future by 
preventing them from being born ; and perhaps there is no 
effective way of doing this unless by extermination. 

45. There is yet another way of looking at the subject 
which will lead us to similar general conclusions. The way in 
which improvements really benefit society is by increasing the 
quantity and quality of the commodities necessary to existence, 
health, comfort, and happiness. But when we consider the 
relations of special classes of men we find that different classes 
consume different commodities. Improvement in the produc- 
tion of silk dresses, linen shirts, white neckties, gold watches, 
and fine houses are of no benefit to the class of unskilled 
laborers, who cannot command or do not want any of these 
commodities, even when they are cheapest. What is neces- 
sary to the amelioration of this class is improvement in 
the production of corn, pork, coarse cloth, flannel, and cheap 
houses. "We may then inquire whether the production of this 
last class of commodities has improved as much as that of the 
other and higher classes. If so, then all classes will be bene- 
fited in -the same proportion. If the improvement in produc- 
ing the necessaries of life exceeds that in producing the luxu- 
ries, the laboring classes will have been the greatest gainers. 
In the contrary case the higher classes will have been the gain- 
ers. This, again, leads us to considerations of fact which the 
reader can advantageously enter upon for himself. 

There is, however, one defect in his conclusions to be guard- 
eda gainst. If we inquire into the effect of improvements 
in production upon human progress, we should make a great 
mistake if we did nothing more than compare class with class 
in the way we have followed in the preceding examples. One 
of the great fallacies which pervade popular economic reason- 
ing arises from failing to distinguish between small classes and 
large ones. We hold up for public sympathy a few individual 
sufferers whom we suppose to have suffered in consequence 



IV. 45.] EFFECT OF LABOR-SAVING IMPROVEMENTS. 395 

of the advance of society, and we ask society at large to stop 
its progress for the benefit of the unfortunate class supposed 
to be represented by these sufferers, without calculating the 
number of this class. "We must admit that, as men are consti- 
tuted, they will be moved more strongly to action by individ- 
ual cases which chance to be presented to them than by 
considerations of the good of a large class which they do 
not see. They forget, or will not comprehend, that the inter- 
ests of millions are more important than the interests of thou- 
sands represented by some particular petitioner or sufferer 
whose case has excited their sympathies. This leads us to see 
that in considering the subject from a philanthropic point of 
view, the beneficent effect of improvements in production con- 
sists in this, that whole classes of men are enabled to enjoy 
more of the luxuries of life. Fifty years ago the majority 
of the inhabitants of this country slept on straw beds ; now 
every inhabitant who wants to can command as good a bed as 
the richest man in the country, so far asrits substantial qualities 
are concerned. We now see in the cottages of every class of 
laborers little comforts which fifty years ago could be com- 
manded only by the wealthy. In a word, the number of those 
who can enjoy the substantial comforts of life is continually 
increasing through improvements in production, no matter 
what doubt may be entertained as to the status of the low- 
est classes of humanity. 

It appears that the general effect of the improvements in 
question is to leave the two extreme classes, the wealthy and 
the worthless, comparatively unchanged. The former can com- 
mand all they want whether improvements go on or not. They 
do indeed gain by the discovery of new means of enjoyment, 
but this is not a merely economic effect, being due to improve- 
ments in knowledge, taste, and morals. The worthless class will 
always be what it is now, no matter what society tries to do for 
it. But all classes between these extremes are constantly ad- 
vancing, and the luxuries of life are becoming accessible to a 
continually increasing proportion of the population. 



396 THE SOCIETABY CIRCULATION. [IV. 46. 



CHAPTER IX. 

THE FUNCTIONS OF THE CAPITALIST. 

46. Theee remains to be considered the effect of investing 
money in the increase of capital. In the popular mind, one 
who invests his money is supposed not to expend it. Hence it 
might be supposed that the effect of the investment of money 
would be that described in Chapter TIL, through the money 
being withdrawn from circulation. But we now know this 
opinion to be erroneous. Investing money consists in transfer- 
ring its ownership to some other person, and receiving in return 
a right of property in capital of some kind. This will be already 
clear to the student who has carefully studied the chapter on 
capital in the second book. The person investing is simply a 
purchaser of bonds, stocks, or material capital ; and if he buys 
bonds or stocks, he becomes the owner of certain rights in some 
form of material capital. 

Although there may be many transfers of the money thus 
invested before it finally reaches the hands of laborers, yet it 
will as a rule ultimately reach them. Suppose, for example, 
that a person A loans a sum of money x to a friend. Then the 
friend has x dollars more and A has x dollars less than before, 
so that the sum total of their power to employ labor remains 
unchanged. Let the friend purchase bonds from a banker 
with the money. Then the power of employing x dollars' 
worth of labor passes to the banker. The money serves the 
banker no useful purpose until he passes it to some one else, 
perhaps a customer. Every one into whose hands it falls must 
be paying or losing interest on it while he keeps it, and he can- 
not gain the interest until he purchases an ownership in some 
form of actual capital. 

As a general rule it will not pass through many hands until 



IV. 47.] THE FUNCTIONS OF TIIE CAPITALIST. 397 

it is employed in hiring laborers to build a Louse or factory, 
or to do some other kind of work necessary to the increase of 
capital. Hence, so far as the employment of labor is concerned, 
expenditure by investment gives the same kind of employ- 
ment as any other kind of expenditure, and thus forms no 
exception to the rule laid down. But if we consider the 
ulterior effects of this mode of expenditure as compared with 
that of purchasing commodities for one's own consumption, we 
shall find that, although the immediate effect is the same, the 
ultimate effect upon the prosperity of society is very different. 
The effects may in fact be divided into primary and secondary. 
The primary effect is that already pointed out in showing that 
the expenditure does not increase or diminish the sum total of 
the demand for labor, but only determines into which one of a 
great number of possible directions the labor shall be directed. 
The secondary effect is to increase and cheapen the production 
of sustenance, and thus to diminish its cost to the community 
and to laborers in general. This secondary effect is produced 
in go indirect a manner that we must view the process through 
which it arises from different points of view. 

47. We begin with an example of a special case which will 
illustrate the theory. Let us suppose that a person, by living in 
the most economical manner possible, could save $3000 per an- 
num out of his income. He then has his choice of two modes of 
proceeding : 

Firstly, not desiring to live so frugally, lie spends his whole 
income in sustenance for himself. That is instead of living 
frugally, he demands fine furniture and carpets for his house, 
books for his library, pictures, jewelry, extra fine clothing, 
horses and carriages for himself, to the total amount of $3000 
per annum. 

Secondly, he may abstain from the enjoyment of these lux- 
uries and expend the income thus saved in building houses for 
rent. 

In changing from the former mode of expenditure to the 



398 THE SOCIETARY CIRCULATION. [IV. 47. 

latter he will, as already shown, be diverting a certain amount 
of the producing power of the country from the work of 
producing furniture, books, clothing, horses and carriages for 
him to the work of building houses for him. So far the 
account is balanced, and the change is neither better nor worse 
for society at large. It is the same if, after each house is built, 
he occupies it with his own family, or uses it in any way for 
his own exclusive benefit. The only change is that society is 
supplying him with houses for his own use instead of supplying 
him with the luxuries already described. 

But suppose that after each house is built he regards it as an 
investment of capital and offers it for rent. Then the condi- 
tions are altered. Society at large, or the particular class of 
society which can afford to live in the kind of a house he lias 
built, will have a larger supply of houses at its disposal. The 
tenants will each be in the enjoyment of a house wkich they 
could not afford to build. Leaving out of account the rent they 
pay, the state of things is the same as if the saver had vol- 
untarily abstained from luxuries in order that these tenants 
might have houses. 

Since, however, the tenants pay rent at the highest market 
rate, the question may arise whether this rent is not in every 
way an equivalent for the benefit rendered by the house, so 
that after all society at large is no better off on account of the 
second mode of expenditure. The reply should be in the 
negative. Society is better off because of the additional supply 
of houses and the consequent lowering of rents. Although the 
market value of the services rendered and received balance each 
other, yet the total utilities do not balance. Each tenant enjoys 
a complete house without having had to save anything to' build 
it. Could they have had no house until they had built them 
themselves, they would have been obliged to go for several 
years almost without shelter. 

Suppose that the man, being of a penurious disposition, 
expends all the rent he receives from his house in building 
still more houses. It is clear that so long as that process con- 



IV. 48.] THE FUNCTIONS OF THE CAPITALIST. 399 

tinues the advantage to the tenants continually increases. 
They all have to pay rent, but that rent is expended in build- 
ing new houses for more tenants ; and so long as the owner 
himself abstains from any enjoyment of the income, so long do 
tenants get the entire benefit both of the houses and of the 
rents. 

Let us inquire more closely into the exact nature of the 
benefit which this investor in houses has conferred. It is 
plain that, whatever the number of houses he has built by his 
saving, that additional number have the tenants of the country 
to live in. The supply being thus enlarged, it is to be ex- 
pected that the rents will be lower in about the same propor- 
tion, so that the entire body of tenants get more houses for 
the same sum total of rent. That is, the competition of land- 
lords lowers rents just as an increased supply of a commodity 
lowers its price. 

But there is one essential difference between this com- 
petition and that in the manufacture and sale of commodities. 
In the latter case there is a certain net cost of production 
below which no amount of competition can permanently de- 
press the price. But what the tenant pays rent for is only the 
use of the house, not its ownership, and the owner makes this 
use available to him through abstinence, which does not cost 
money at all. Now, there is no necessary limit to the possible 
practice of abstinence, and so no necessary limit to a possible 
fall of house-rents through the competition of capitalists. 

48. To consider the subject in a more general way, let us 
suppose that nobody saved any money for investment, but that 
every person in the community expended his entire income in 
providing for the immediate wants of himself and his family. 
Then there could be no increase in the capital of the coun- 
try. For example, no railway can be built unless certain per- 
sons feed the laborers who are engaged in building it ; and in 
order to do this it is absolutely necessary that some one should 
have saved up money or sustenance which he does not want 



400 THE SOCIETABT CIRCULATION. [IV. 48. 

himself. This would not cause any positive loss in a commu- 
nity which did not increase in population, and which was con- 
tent to remain stationary in its consumption of commodities. 
That is to say, if all the railways, farms, factories, fences, and 
other forms of capital, and the whole supply of raw material 
employed in production, are kept up to their present standard, 
while population remains the same, the wants of the stationary 
population will continue to be supplied as well as ever, but no 
better. 

If, however, the owner of a railway should allow the rails to 
rust out without having saved the funds to replace them, and if 
the same thing should happen to the other fixed capital of the 
country, there would be a positive diminution of capital with- 
out, apparently, any one ceasing to live on his income. But this 
would amount to the same thing as expending not only one's 
current income, but also the capital he had before accumulated. 
In order to keep up his capital the owner must save enough 
from his income to make good its wear and tear. If he does 
this and nothing more, he will still be expending his entire 
income. 

Suppose that under these circumstances population increases. 
Without any new railways, factories, fences, and farms there 
can be no increase in the production of commodities ; or, at 
least, the increase will not be proportional to that of the labor 
which would now be available. The result would be a general 
scarcity and higher prices. Men would be compelled to seek 
out new farms; but since, by hypothesis, no one has any 
money to loan them, they must supply their own wants as best 
they can while cultivating the farms. Since no new railways 
are built, the farther they go from the railways the farther 
they will have to haul their produce to market. Since no more 
clothing can be made, every one would have to go with a con- 
tinually diminishing amount of clothes. The result would be 
scarcity, distress, and perhaps famine, continually increasing 
from year to year. 

Of course the same result would happen yet more rapidly if 



IV. 49.] THE FUNCTIONS OF THE CAPITALIST. 401 

the owners of capital not only failed to add to their savings, 
but suffered the capital which they already possessed to go to 
decay. After the rails are rusted out no more freight can be 
drawn over the road ; after the machinery is worn out no more 
goods can be made until it is replaced. 

Now, the fact is that a large majority of persons in every 
community do act in precisely this way. They do not save 
any part of their income to be invested in capital. In fact, our 
typical idea of a laborer is that of one who has never saved 
anything from his earnings, while by a capitalist we mean a 
man who has saved money from his income and employed it in 
hiring laborers to improve the capital of the country. A large 
majority of laborers, even if they were placed in possession of 
capital, would probably employ it in satisfying their current 
wants. Hence if there were no capitalists there would be a 
continual increase of misery, want, and starvation which would 
go on unceasingly with the increase of population. 

49. The same thing may be seen in another light from the 
communistic point of view (Part II., Chapter IX.). Referring 
to the conception of a national reservoir of wealth, it is evi- 
dent that the less sustenance any one draws from this reservoir 
the more will be left for others. Now, a non-capitalist is a per- 
son who withdraws from the reservoir in the form of suste- 
nance everything to which his services entitle him ; that is, his 
whole income. The capitalist is one who does not withdraw 
all this sustenance. He leaves in the reservoir that portion of 
his share to which his investment would entitle him, and, in- 
stead of taking the sustenance, becomes the owner of capital 
designed to increase the production of sustenance. Let us call 
A that part of his income which the capitalist expends for 
sustenance, and B that part which he invests in capital, say 
railway stock and machinery. 

If he consumed this railway and machinery to supply his 
own wants, then, so far as the interests of society are con- 
cerned, he might as well have taken the portion B in suste- 
26 



402 THE SOCIETABY CIRCULATION. [IV. 49. 

nance at once. But lie cannot consume any considerable part 
of his railways, machinery, or other form of capital in the sup- 
ply of his own needs. The palace-car in which a railway pres- 
ident sometimes travels is indeed a product of the capital of 
the railway consumed as sustenance. But it is a very small 
fraction of the earnings of the road. The great function of 
the road is to produce sustenance and bring it to the reservoir 
for use by the public. 

But the reader must guard against a misunderstanding. We 
have apparently shown that the capitalist not only leaves his 
share of sustenance for others to consume, but also the whole 
product of his capital. But this would be a misinterpretation. 
It is true that if we suppose the sustenance which he declines 
to take to have been previously brought into the reservoir, this 
would be true so far as that particular fund of sustenance is 
concerned. But he cannot get his capital without employing 
labor to produce it. So he says to the laborer, " Instead of 
producing sustenance for me to consume, produce capital for 
me to use in further production." Hence, in the very act of 
refusing his sustenance, he withdraws a corresponding amount 
of labor from the production of sustenance and devotes it to the 
production of railways, mills, or other forms of capital. Less 
sustenance and more capital is produced. But do not forget 
that this diminution of sustenance does not come out of the 
share of others, but is only the capitalist's own share which he 
has refused to order. 

As already shown, he cannot get any use of his capital except 
by making sustenance with it. Moreover, if his investment is 
a profitable one, the amount of sustenance thus made must be 
greater than that which he refused to consume. Since capital 
is really a labor-saving contrivance, we must expect that this 
will always be the case except when bad investments are made. 

The question may now be asked, Since all this extra suste- 
nance which he receives as profit belongs to him, in what way 
is society benefited ? The reply is this : By hypothesis, it is 
sustenance which, although he owns, he does not himself want 



IV. 50.] THE FUNCTIONS OF TEE CAPITALIST. 403 

to consume. If lie had wanted to consume it, lie would have 
consumed it in the first place and never purchased his capital at 
all. Since, then, he necessarily offers this increased supply of 
sustenance in the public markets for sale, the result is a fall in 
the price of sustenance generally, arising from a more plenti- 
ful supply at the command of the community. Thus we reach 
the very same result that we did by the former reasoning in 
the case of houses, the enjoyment of houses being equivalent 
to the consumption of sustenance. 

Let us observe, in illustration of all this, the actual process as 
we see it going on. A barrel of flour can now be transported 
from Chicago to New York for about fifty cents. Thus at an 
insignificant cost the whole population of ISTew York can draw 
their food from the Western prairies. This would have been 
impossible unless railways had been built. The railways would 
never have been built if the Yanderbilts and other wealthy 
men had not saved up their income and employed it in build- 
ing railways. 

50. A clear understanding of this intricate subject is so 
important to one desiring a complete command of it that we 
shall go over it in yet another way. From what has been said 
in the preceding chapters it will be seen that the monetary 
flow to a person whom we call an agent is divisible into two 
portions, the one income, over the expenditure of which he 
has complete command, and the other business expenses, over 
which although formally he may have equal command, yet, 
practically, which he is obliged to expend in the ways deter- 
mined by the condition of his business. With this latter 
portion we have at present nothing to do, being concerned 
only with his expenditure of income. 

In relation to his income we may regard him either as pro- 
ducer or consumer. As a producer his income is the money 
value of his contributions to the wants of others. These contri- 
butions may be in the form either of capital or of sustenance, 
but they are determined immediately by the demands of 



404 THE SOCIETART CIRCULATION. [IV. 50. 

others for his products, coupled, of course, with his own 
talents. In other words, if he made shoes rather than clothes, 
it was not because he thought shoes a better thing to make 
than clothes, but because he found, or thought he would find, 
people wanting shoes rather than clothes. In whatever branch 
of business activity he engaged, we may assume that he 
chose it on account of the wishes of others rather than of him- 
self. Hence he is not to be considered responsible for the 
direction of his producing activities. 

But when we consider him as a consumer of commodities 
or expender of income the case is reversed. He holds in his 
hands the power of directing an amount of industry represented 
by his income. He thus becomes a power determining what 
he shall demand from society ; and the question which arises 
is whether society has any more interest in his demanding 
one thing than another (cf. Chapter VI.). 

From what has been said it will be seen that there are two 
ways of making this demand. The agent may either purchase 
something already made, or he may hire laborers to make it. 
But it has already been shown that these two methods lead 
substantially to the same result. It is true that in the first case 
he does not immediately direct any industry at all, since all 
he does is to purchase from some seller, X, a commodity, C, 
already made. But in the very act of paying for C he places 
in X's hands both the power and the disposition to reproduce 
C in the future by re-employing labor if necessary. Hence, 
whether he purchases or employs a laborer to make C, he 
directs a certain amount of labor to that production in the very* 
act of expending his income. 

The only question which we have left is whether the com- 
modity C which the agent demands is sustenance for himself 
or capital. The capital may be sustenance for sale to some 
one else. If he demands sustenance for himself, then his ac- 
count with society is balanced ; he simply consumes the equiv- 
alent of his income, that is, of his contributions to the suste- 
nance or capital of others. But if he demands any form of 



IV. 51.] THE FUNCTIONS OF TEE CAPITALIST. 405 

fixed capital, then, until that capital produces something for 
some one else to enjoy, society at large is in exactly the same 
condition as if he had demanded sustenance for himself. The 
changed condition of things arises when that capital begins to 
produce sustenance which is offered for sale. If we suppose 
the agent's demand for capital to have included everything 
necessary to make the capital effective, which of course we 
must do, then it would have comprised not only fixed capital, 
but raw material to be manufactured, and sustenance for the 
laborers employed in the manufacture. To make the matter 
clear, we may divide his investment into three parts : 

F, that part expended in fixed capital ; 

C, that part expended in raw material for manufacture ; 

W, that part expended in the payment of wages. 

Each of these items represents a fund of labor which he 
could have required to be devoted to sustenance for him- 
self. 

The portion "W represents that portion of the fund of suste- 
nance which he owns and commands, but the right to which 
he delivers over to the laborers in exchange for other work. 
Thus the laborers enjoy a certain amount "W of sustenance 
which would otherwise have been consumed by the agent. 

The machinery now goes to work ; the raw material is manu- 
factured into some finished product, sustenance or capital, 
and the result is that an increased product is for sale to society, 
thus resulting in competition and a reduction of prices. 

51. Let us now consider whether the laborer, that is, the 
non-capitalist, really has, through the saving of the capitalist, 
an opportunity to consume a greater value than he produces. 
Taking the case just as it stands, our answer must be in the 
negative. Suppose the capitalist to have allowed the tenant 
to live in his house for a whole year free of rent, except such 
amount as might be necessary to keep the house in its original 
condition. Then when the tenant restored the house to the 
owner at the end of the year, it would be in the same condi- 



406 THE SOCIETARY CIRCULATION. [IV. 51. 

tion as when he took it. He would therefore have consumed 
nothing more than he reproduced by keeping up the repairs. 
Hence whatever portion of the rent he pays as interest on the 
capital invested is over and above his actual consumption of 
the house. It might therefore seem that he gets no equiva- 
lent for that portion of the rent which he pays for interest on 
capital. 

This is the same stumbling-block that we have already de- 
scribed in the chapter on the rate of interest (Book II., § 72). 
It is very evident that the capitalist has given him during the 
whole year the use and shelter of a house which would never 
have existed but for the capitalist's savings. Now, it is this 
use which measures the benefit conferred, and not the consump- 
tion of the house. Perhaps in thirty years the tenant could 
have saved money enough to build the house himself, but he 
must have the house now ; and the benefit rendered consists 
in the capitalist letting him have now what, by his own ex- 
ertions, he would not have had for thirty years. But it still fol- 
lows that he must, at the end of his tenancy, return the house 
in as good order as when he got it, besides paying interest on 
the capital invested in it. 

Beturning, then, to our original question, we find it to be 
really true that the capitalist does not allow the laborer to con- 
sume more than he produces. But we must remember that 
he produces more than he would have produced without 
capital. Capital, skill, and organization are the great labor- 
saving agents. The more they improve the more productive 
labor becomes. Now, the laws of supply and demand permit* 
the laborer to command his full share of this improvement 
although it was effected by the mental powers of a much 
higher class of men. 



EXERCISES. 407 



EXERCISES. 

1. When Mr. George Peabody made his great gift for the benefit of the 
London poor, he directed that it should be expended in building houses for 
them and renting these houses to them at a moderate rental. The income 
thus gained was to be continually expended in building additional houses 
for other poor. 

1. By this arrangement did the benefactor confer as great a benefit upon 
the poor as if he had directed that the houses should be occupied free of 
rent? 

II. In what respect did his action differ in its effect from that of a mi- 
serly capitalist who invested his whole surplus income? 

2. Explain the function of capital and the reason for interest from the 
point of view taken in III. 78, and show that great numbers of people are 
now in the enjoyment of the past labor of other people. 

3. From the same point of view, show by examples drawn from indus- 
trial works that the man who would make improvements in future pro- 
duction on a large scale is obliged to help others in order that he may 
attain that end. 

4. Of two young men, the one spent all his income in expensive clothing 
and in giving entertainments to his friends, in order to encourage trade, 
while the other invested his income in railway bonds. Compare the eco- 
nomic effects. 

5. Give examples additional to those in the text of the effect upon 
society of a general decay of the desire to accumulate wealth on the part 
of capitalists. If none of , the next generation of men should try to get 
more than one hundred dollars ahead of their current expenditure, what 
would be the result? 

6. Is it better for the typical laborer who is never going to save any- 
thing that the capital of the country should be mostly concentrated in the 
hands of a few persons, each possessing an immense fortune, or that it 
should be divided with an approach to equality among a great number 
of small capitalists? Consider especially the case of the New York Cen- 
tral and other great railways of the country. [We here suppose society 
divided into two classes, a laboring class L, and a capitalist class C, own- 
ing a definite quantity P of capital. We want to know whether it is better 
for L that the capital P should be distributed equally among C or concen- 
trated in a few hands.] 



408 THE SOCIETART CIRCULATION. [IV. 53. 



CHAPTER X. 

THE RELATION OF CAPITAL TO LABOE. 

52. As society is constituted, employment can be given to 
labor only by and through the instrumentality of capital. That 
is to say, no person can employ labor unless he has money saved 
up which he does not want for his own immediate use, with 
which to pay the laborers their wages. These wages would be 
of no use to the laborer unless there were sustenance in the 
market for him to buy with his wages. This sustenance must 
be such as the owner does not want for his own immediate sup- 
port, else he could not afford to sell it. It is sustenance, as 
already shown several times, which constitutes the only real 
wages, and in paying the laborer money the employer only sup- 
plies him with the means of obtaining the sustenance. We 
might therefore simplify the problem by considering the em- 
ployer as the owner of the sustenance which he gives the la- 
borer in exchange for his work, were it not for a liability to be 
misunderstood. 

The laborer must also have tools and machinery to work with. 
Tools and machinery are forms of capital, and must be supplied 
by a capitalist. If, as may well happen, the laborer owns his 
own tools, he is himself to that extent a capitalist. 

A third form of the capital necessary to the employment of 
labor is the raw material on which the laborer must perform 
the act of production. In agriculture the raw material com- 
prises manure and seed. In the cotton-mill it is cotton ; in a 
clothing-factory it is cloth. 

Fixed capital in the form of tools and machinery, circulating 
capital in the form of sustenance, and circulating capital in the 
form of raw material may therefore be regarded as immediate 
necessities to the employment of labor. But it does not at all 



IV. 53.] THE RELATION OF CAPITAL TO LABOR. 409 

follow from this that there is any mathematical relation between 
the value of the capital and the amount of employment it gives 
to labor. In digging up a street, all the fixed capital necessary 
to the employment of a digger may be a pick and spade, each 
worth fifty cents. In a great cotton-factory capital to the value 
of hundreds of dollars may be necessary for each operative. We 
must therefore seek for some other mathematical measure of 
capital than the value of the accumulated fund, if we are to 
discover a mathematical relation between capital and the labor 
it can employ. To do this we must refer to the distinction 
already pointed out between capital as a fund and the flow of 
capital. 

53. Let us inquire what constitutes the funded capital of a 
cotton-factory. We readily see that the owners of the factory, 
in establishing it and putting it into successful operation, had to 
invest their capital in the following way : 

Firstly, they had to erect the necessary buildings and place in 
them the necessary machinery. Secondly, they had to supply 
themselves with a sufficient quantity of raw material to keep 
the operatives employed until they begin to receive returns 
from the sale of the goods. In order that they may incur no 
danger of the factory having to stop for the want of material, 
it is necessary always to have a considerable supply on hand. 
Thirdly, it was necessary to have a sufficient accumulation of 
money to pay the wages of the operatives until the owners be- 
gin to be reimbursed from the sales of the product. 

If we take an inventory of the invested capital at any state 
of its progress, we shall find that, in addition to the forms enu- 
merated, there is a greater or less supply of the finished products 
on hand waiting to be sold, and a certain amount of debts due 
from parties to whom sales have been made. It often happens 
that payment is not expected for three or six months after the 
delivery of the goods. When this is the case the owners of the 
factory must have a supply of raw material and finished goods 
sufficient to keep the factory going during the whole period 



410 THE SOGIETARY CIRCULATION. [IV. 53. 

that any particular portion of the material is undergoing the 
process of manufacture, and for three or six months longer. 
Thus at any time we shall find the capital to consist of build- 
ings, machinery, stores of raw material, material undergoing 
the process of manufacture, stores of finished products waiting 
the market, money in bank to pay operatives, and debts due 
the company. Subtracting from these the debts due from the 
company, we shall have the value of the fund of capital. 

In the average normal case this accumulated fund varies very 
slowly, although the principal items which make it up may 
vary greatly, one diminishing while the other increases. The 
sum total will represent the abstinence of the owners which has 
given rise to the factory. It is the fund on which they expect 
to gain a profit to compensate for this abstinence. 

But we cannot, merely from the knowledge of how many 
dollars are thus invested, conclude what number of laborers 
the factory can give employment to. This depends upon the 
rate at which the capital is being transformed. We are to con- 
sider the capital as in a constant state of flow, material flow- 
ing in at one end, passing along through the factory, and flow- 
ing out at the other end. A smaller but much slower flow is 
going on in the fixed capital, the machinery being worn out 
and constantly needing labor to replace it. As a part of the 
same process we must consider the flow of wages to the oper- 
atives. As already pointed out, this flow may be considered as 
coming from the owners of the capital. Thus we may count 
up in all three flows of capital to the factory: the raw material 
to be transformed, the sustenance for the operatives and man- 
agers to consume, and the labor applied to the continual reno- 
vation of the buildings and machinery. From the factory we 
have the one flow of finished products which goes to society at 
large. The return flow of money, received in exchange for the 
finished products, branches off in the three directions through 
which labor and material come to the factory ; that is, one flow 
of the money goes to the operatives, another to the suppliers 
and repairers of buildings and machinery, and a third to the 



IV. 54.] THE RELATION OF CAPITAL TO LABOR. 4H 

producers of raw material. Besides these we have a fourth flow 
to the owners of the factory. Considering these owners purely 
as capitalists, this last flow is their compensation for abstaining 
from the enjoyment of the capital invested in the factory. In 
so far as they are managers it is their compensation for the skill 
and labor which they have expended in the management. 

54. We now see that the efficiency of the factory as a means 
of employing labor depends, not upon the amount of the accu- 
mulation, but upon that of the flow, especially of the flow to the 
operatives. In other words, the efficiency depends upon the 
value per annum which the factory can add to the flow of the 
raw material passing through it. This, again, is little more than 
the very obvious and childish-looking proposition that the fac- 
tory can employ just as many laborers as it can profitably keep 
at work. 

We have now to inquire what is the test that the laborers 
are profitably at work. The answer is that the value of the 
product turned out from the factory, considered as sustenance, 
must exceed the value of the material and labor devoted to the 
work of production. To take the simplest conceivable case : 
if a laborer, requiring no capital whatever, consumes one dol- 
lar's worth of food per day, and only turns out a product worth 
fifty cents a day, his labor is unprofitable. Such labor can- 
not be kept up permanently. If he uses one dollar's worth of 
raw material daily, then, in order that his work may be profit- 
able when he consumes at the same rate, the product of his 
day's labor must be worth more than the two dollars expended 
in production. 

Taking the largest view of the case, the profitableness of 
the factory is measured by its capability of paying dividends 
to its owners. If no profit is made, then the value of what 
the factory consumes must be equal to or greater than that 
of the product turned out, and the establishment must be 
unprofitable not only to its owners, but to society at large. 



412 THE SOCIETARY CIRCULATION. [IV. 55. 

55. There are two possible ways of measuring the benefit 
of such capital as a factory to laborers, namely : 

Fallaciously, by the employment it gives to laborers. 

Correctly, by the sustenance it produces for laborers. 

Measured in the first way, the laborers are considered as con- 
sumers, and the sustenance which they consume is supposed to 
be due to the capital invested in the factory. But it must never 
be forgotten that this sustenance would never have been avail- 
able if some one else than the laborers had not saved it, and 
that it was this saving, and not the existence of the factory, 
which made it available. We must therefore regard this 
popular measure of the benefit of the factory as entirely falla- 
cious. We should rather regard it as the measure of what 
the factory costs society at large, because labor is the produc- 
ing power of society, and is limited in supply, and the work 
of the factory may be said to consume a portion of this supply. 

The true measure of the value of the factory is not the 
consuming power of the laborers, but the producing power of 
their work, or rather, as just shown, the excess of the sus- 
tenance produced over that consumed. 

The important question now arises : Let the factory produce 
a form of sustenance which the lower orders of laborers do 
not want, gold watches for example. Then, since the sus- 
tenance consumed is the food and clothing of the operatives, 
the work of the factory results in a positive diminution of food 
and clothing. Is its effect, then, not positively injurious to 
the poorer classes? 

We reply, Yes, if we make abstraction of every agency ex- 
cept this particular factory. But, as already shown, the work 
of all the factories of a country is divided up in proportion to 
the demand for their several products. We may be sure, 
therefore, that for every watch-factory at work for the wealthy 
there will be a corresponding number of other factories pro- 
ducing coarse or fine food and clothing in proportion to the 
sustenance demanded by the various classes of society. 



IV. 56.] LAWS OF A HETEROGENEOUS CURRENCY. 413 



CHAPTER XL 

LAWS OF A HETEROGENEOUS CUEEENCY. 

56. In our consideration of monetary operations we have 
hitherto not taken account of any distinction between the effects 
of the various kinds of currency which may be in circulation. 
We have supposed that every dollar which a man received was 
paid out by him as soon as he could satisfactorily spend it, and 
that lie spent it in the same way whether it was a gold, silver, 
paper, or credit dollar. But there are certain cases in which 
these different kinds of dollars will not always be used in the 
same way, and will therefore not have the same economic 
effect. 

Let us suppose that, in a country using gold only as money, 
the currency is expanded by the addition of irredeemable paper 
money. The first effect of this addition to the currency will 
be a general increase in the demand for goods. This demand 
will produce an increased activity in trade, to be followed by a 
general rise in prices. Since this rise of price is confined to 
the country in question, its citizens will be led to purchase 
goods abroad, and thus to export gold. It will also lead them 
to invest more money in watches, jewelry, picture-frames, and 
other things made of gold. The result will be a diminution in 
the quantity of gold in circulation. The equilibrium will be 
reached when the gold eliminated from the circulation is equal 
to the paper money which has been added. The scale of prices 
will then be the same as before, and the only effect of the change 
will be that paper has displaced a certain quantity of gold in 
the circulation, in the same way that a stone placed in a vase 
full of water will displace a volume of water equal to its own 
bulk. 

Another similar addition to the currency will be followed 



414 THE SOCIETART CIRCULATION. [IV. 57. 

in the same way by a disappearance of another portion of gold ; 
and if the increase be continued, the final result will be that 
all the gold will disappear from circulation. Besides being ex- 
ported and melted into jewelry, it will be hoarded up by indi- 
viduals and banks according to a law now to be developed. 

57. Gresham's Law. This law is : A cheaper or depre- 
ciated currency always tends to displace a more valuable one. 

At first sight this statement may seem to contravene one of 
the admitted principles of economics by implying that the 
worse article is preferred to the better one. But it is really in 
strict accord with fundamental principles. For the special pur- 
pose of making an exchange bad money may answer as well as 
good money. Now, we always prefer for any purpose the 
cheapest article which will answer that purpose, unless some 
evil to the person using it attends its use. For example, we 
do not make our axes out of gold or silver, but prefer the 
cheapest metal, namely, steel, which will answer the purpose. 
If there were a community which had to make silver axes be- 
cause it had no steel, we should find that when that community 
began to trade with the rest of the world, the silver axes would 
entirely disappear and be replaced by iron or steel ones. The 
case is exactly the same when gold is replaced by paper. As 
silver can be put to other uses than making axes, so gold has 
other uses than that of serving as money. 

For a similar reason a slightly depreciated paper currency 
also tends to displace any other paper currency which is at par 
with gold, always provided that the depreciated paper is ac- 
cepted in trade. The rule is that it will be so accepted within 
certain limits. If a bank-note in New York is worth 98 cents 
on the dollar, a retail dealer would rather accept it and pocket 
the loss than lose his bargain or run the risk of offending; his 
customer. Then, since the latter can only get 98 cents for it 
at a bank, he will pay it out in preference to a good bill. The 
very same motive will prompt the dealer who receives the bill 
to pay it out in preference to other bills, and thus the depre- 



IV. 57.] LAWS OF A HETEROGENEOUS CURRENCY. 415 

ciated money circulates with greater rapidity than any other. 
No more powerful stimulus can be given to trade than the feel- 
ing of everybody that it is for his interest to get rid of money 
as soon as he receives it. Moreover, if the depreciated cur- 
rency is circulated in such quantities that everybody expects to 
receive it, then, instead of refusing it, the more gracious course 
on the part of the dealer is to raise the price of his goods. 
Thus, when the bulk of the currency will only bring 90 cents 
on the dollar, it is more to the interest of the trader to raise the 
price of his goods 10 per cent than it is to dispute with his 
customers about the money they offer him. 

The most striking example of the operation of this law is seen 
when, owing to the depreciation of the currency, the metal in 
the minor coins becomes more valuable than the money in which 
larger payments are made. When, in the year 1862, our 
government began to issue paper money and, in consequence, 
a gold dollar became more valuable than a paper dollar, all the 
small silver coins disappeared from the circulation. The rea- 
son was that every man who paid four silver 25-cent pieces in 
change for a paper dollar gave more than the dollar was worth. 
Every man who paid out the 25-cent piece paid what was worth 
more than that amount. It might indeed seem scarcely credible 
that the whole community would put itself to great inconven- 
ience for so insignificant a reason. But the result is neverthe- 
less an historical fact of universal experience. It is probably 
to be explained, not by supposing that everybody hoards his 
small change in the case supposed, but that people here and 
there do so. If only one man out of ten, or even one out of fifty, 
keeps all the small change he receives, a scarcity very soon re- 
sults. 

Let us now return to the case of the infiltration of paper 
currency into a gold circulation. If it be continued, the gold 
will all be displaced. There will also be a slight, though not 
necessarily great or permanent, rise in the scale of prices. If, 
however, the addition of paper currency be continued, then, as 
already shown, prices will rise ; or, in other words, the curren- 



416 THE SOCIETABY CIRCULATION. [IV. 58. 

cy will depreciate. There is no limit to the possible amount of 
this depreciation. If the paper money is accepted, which it 
must be if made a legal tender, every one will expect to be 
paid in paper, and will charge accordingly. The gold dollar 
having the same value as before, gold will be at a premium, 
the banks will refuse to part with it, and private individuals 
will hoard it. It will be bought and sold in the public mar- 
kets like any other commodity, to be exported to foreign coun- 
tries in payment of goods, or to be made into articles of utility. 

58. The reader can now form in his mind a symbolic pic- 
ture of the operation we have described. To make this picture 
correspond as nearly as possible to the actual case in our own 
country, let us. supjDOse that our material currency is of three 
kinds, gold, silver, and paper. The gold in the gold dollar is 
more valuable than the silver in the silver dollar, while the 
paper in the paper dollar is worth much less than either. The 
order of absolute value is then jpaper, silver, gold. By Gresh- 
am's law, the silver tends to displace the gold, and the paper 
to displace both. 

The question may now arise how, on the law in question, 
it is possible for the gold or silver to circulate at all, if the 
paper money is preferred to make payments with. But the 
law does not say that the two heterogeneous currencies cannot 
circulate together, but only that one tends to displace the 
other. The solution of the difficulty is found in the law al- 
ready laid down that, under given conditions of trade and in- 
dustry, a certain volume of currency is absolutely necessary to 
carry on the trade of the country on a certain scale of prices. 
Our experience seems to show that if our material currency 
were exclusively of gold, we should need about fifteen dollars for 
each inhabitant, exclusive of the credit currency of the banks. 
If then we have a population of sixty millions of people, they 
will need nine hundred millions of dollars in gold to transact 
their business on a scale of gold prices. Since this amount is 
absolutely necessary to make the payments, it follows that if 



IV. 58.] LAWS OF A HETEROGENEOUS CURRENCY. 417 

there is less than nine hundred millions in paper money, it is 
absolutely necessary to make use of silver or gold. If the silver 
and paper together are less than this amount, some gold must 
still be used ; otherwise prices would fall so low that a gold 
dollar would be worth less than a currency dollar, and this 
would lead to the importation of gold and thus remove all 
temptation to hoard it. 

This condition that nine hundred millions is necessary may 
be represented to the mind by the contents of a vase which 
holds just nine hundred millions of any kind of dollars. The 
paper, silver, and gold currencies combined are then just suffi- 
cient to fill this vase when the scale of prices is on a gold basis. 
The fact that if we now infiltrate more paper into the currency 
gold will begin to pass out, is represented by supposing that 
if we now add more paper to the vase an equal quantity of 
gold will overflow. To make the comparison complete, we 
must suppose that the gold, though the heavier metal, tends to 
float to the top of the vase, the silver to float under it, and the 
paper to be at the bottom. Then if we continue to pour in 
paper money, the gold will soon have floated out in equal quan- 
tity. When the gold is all gone, the silver is at the top and be- 
gins to flow out. If so much paper is added as to fill the vase 
and displace all the silver, what will then happen ? If there is 
any place to which the paper can flow, then it will begin to 
flow out. For example, if the paper is redeemable in silver or 
gold, then, when its volume exceeds nine hundred millions, 
people will take it to the banks or Treasury for redemption. 
Thus it will be impossible to get more than the nine hundred 
millions in circulation. 

If, however, it cannot be redeemed, this is the same thing as 
saying that the vase is so closed that the paper cannot flow out 
of it. Then prices will rise, so that not only will more than 
nine hundred millions of money be in circulation, but more will 
be necessary to the business operations of the country. We 
may represent this state of things by imagining our vase to be 
27 



418 THE SOCIETABT CIRCULATION. [IV. 58. 

of some flexible material which will expand to any extent when 
we force paper money into it. 

By thus forming a mental picture of the vase containing, 
from the bottom downwards, gold, silver, and paper money, 
and by imagining that as one or the other kind of money is 
added it displaces other money in the way described, or ex- 
pands the vase when there is no other money to displace, we 
shall have an exact conception of the way in which different 
kinds of currency affect each other. 

The law of expansion of price when the currency becomes 
too redundant explains a fact which frequently perplexes fin- 
anciers who have experimented with paper money. It is that 
an issue of such money does not result in a lowering of the 
rate of interest, or indeed in any accumulation of money at the 
great centres of trade. The supply of money is apparently as 
scarce as ever or scarcer. The reason is that, on the higher 
scale of prices caused by the money, more dollars are required 
to carry on the exchanges of the community. 

ILLUSTRATION OF GRESHAM'S LAW IN THE HISTORY OF THE 
COINAGE AND CURRENCY OF THE UNITED STATES. 

From the establishment of the "United States mint to the year 1834 
our gold dollar weighed 27 grains 916£ fine, and the monetary ratio for our 
coinage was 15 : 1. But the market ratio of value of the two metals was 
generally greater (cf. II. 68). The result was that very little gold was 
coined, and that little did not get into common circulation. 

By the acts of June 28, 1834, and January 18, 1837, the weight and fine- 
ness of the gold dollar were changed to those stated in II. 68, making the 
ratio 16 : 1. The result was that gold came into circulation, and, after the 
gold discoveries of 1849, silver disappeared from circulation except as 
subsidiary coin. In 1853 the subsidiary coins also began to disappear, 
and, in order to keep them in circulation, Congress had to reduce their 
weight by seven per cent. This device worked until 1862. Then, when 
large volumes of notes irredeemable in coin were issued, gold soon disap- 
peared from circulation, and began to command a premium. The sub- 
sidiary silver coin remained until the premium on gold began to approach 
ten per cent, and then it disappeared also, much of it going to Canada. It 
was replaced by postal notes. In 1873 occurred the great fall in the mar- 
ket-price of silver, which restored the small silver coins before the premium 
on gold fell to ten per cent. 



IV. 59.] OF ECONOMIC FALLACIES. 419 



CHAPTER XII. 

OF ECONOMIC FALLACIES. 

59. In a former chapter certain fallacies in economic method 
were described. These consist in a generally incorrect way of 
viewing the subject in its logical bearings, and do not there- 
fore necessarily lead to erroneous practical conclusions. We 
have now to consider fallacies which lead men into incorrect 
views of public policy, and opinions of governmental action. 
Although these fallacies are unlimited in the number and 
variety of their forms, we shall find on analyzing them that 
most of them proceed from one central root, from which they 
divide like the branches of a tree. The root of the whole sys- 
tem consists in mistaking the means of industry for its end. 

Let us first see how natural is the process of thought which 
leads us to concentrate attention on means rather than on ends. 
We have before us a mechanic who is, for the time being, out 
of work. In consequence he sees before him the danger that 
his family will suffer for the necessaries of life. He wants a 
supply of food and clothing to protect them against hunger and 
cold. But he does not say to his fellow-men, " Give me food 
and clothing," because he knows they cannot or will not do it 
when asked in this way. He knows that he must have money 
to buy the commodities he wants. He knows, however, that 
it would be equally useless to say, " Give me money." He 
knows that to get money he must work for it. So what he 
really says to the public is, " Give me work to do," although 
what he really wants is, not the work, but the necessaries which 
the work will yield him. The work is the means, and the only 
means, of commanding the necessaries, but not at all the end of 
his exertions. Yet it is by an evidently reasonable process that 
he is led to asking, not for what he wants, but for the means to 



420 THE SOCIETABT CIRCULATION. [IV. 60. 

get it. So far, therefore, no fallacy actually shows itself, but 
only an open door through which an unending line of fallacies 
may come in. 

60. The first fallacy of the line comes along in the charac- 
ter of what might pass muster as an obvious truth, and so is 
harbored by all classes. 

The laborer thinks and says, The greater the means the more 
perfectly the end will be attained ; the more work I can get the 
more food and clothing I can buy for my family, and the more 
perfectly they will be fed and clothed. 

The employer thinks and says, The greater the demand for 
my commodities the more employment I can give to my la- 
borers and assistants, and the better off they and I will be. 

The man of business thinks, The more buying and selling 
we can do the better off we will be, and the more perfectly our 
customers and patrons will be supplied. 

The shipper thinks, The greater the quantity of goods I im- 
port and export the more pleased the country in general and 
my firm in particular will be. 

The statesman says, The greater the amount of rolling and 
hammering of metal the more perfectly the country will be sup- 
plied with those requirements of wealth which are made of 
metal. 

Is not all this obvious and true ? I answer, ~Ro. The propo- 
sitions are not true as general ones ; they are true under some 
conditions and not under others. Their truth or falsity de- 
pends on the manner in which the increase of labor and of 
activity in business is brought about. Among all classes of 
society we find men who are desirous of increasing the activi- 
ties just described by increasing the necessity for them. The 
mechanic finds that he is out of employment because some 
large manufacturer has been introducing machinery to do the 
work which he, the mechanic, formerly did, so that his labor is 
no longer necessary. He therefore denounces the machine and 
tries to stop its products from reaching the public. If success- 



IV. 61.] OF ECONOMIC FALLACIES. 421 

fill, lie will create a greater necessity on the part of the public 
for employing him. The carpenter knows that if the house 
which he has just built should burn down the owner would 
be obliged to build another. He therefore looks upon the fire 
feeling that, although a loss is inflicted on some one else, it is 
a gain to him by increasing the demand for his labor. The la- 
borer feels that if a dam is washed away by a freshet, a benefit 
is done him by creating a demand for his labor. The states- 
man says that if we can keep people from getting iron from 
abroad, there will be more made at home, and thus all the 
makers will be benefited. All these we may call labor falla- 
cies. 

61. From this same root comes out another branch, which 
may be called the money -fallacy. Since money is what the 
laborer wants to buy with, and since it seems evident that the 
more money the government puts into circulation the more 
easily he can command it, he wants the government to issue all 
the money it can. The dealer in fancy goods wishes that eco- 
nomical man who is saving up his money to spend it more free- 
ly, because he can thereby give more employment to labor, or 
help somebody to do so. When a great body of summer tour- 
ists who had intended to go abroad are kept at home by the 
cholera, merchants congratulate themselves that the million of 
dollars which they would have carried away with them are to 
be spent at home and thus to benefit the country. 

A curious feature of these fallacies is that they are the pro- 
duct of civilized training, and that a savage would see their 
logical character a great deal more clearly and quickly than the 
civilized man does. If we could give a savage a bird's-eye view 
of the country, and explain to him that from any cause what- 
ever the people had made more clothing than could possibly be 
worn by the whole community, and had piled up greater quan- 
tities of food than they could possibly eat, and that a large 
body of industrious foreigners had thrust upon them more 
manufactures of iron and brass than they knew what to do with, 



422 THE SOGIETART CIRCULATION. [TV. 62. 

and that in consequence there was a great dearth of something 
to do, his first notion would be that this was a very happy state 
of things for the people of the country. It would require long 
years of training to make him conceive how it could be an un- 
happy state of things, and possibly the attempt might utterly 
fail. Now, in reality, and from the point of view of common- 
sense, the savage would be right. Looking at the subject from 
the savage's standpoint, we see the utter absurdity of supposing 
that it can be bad for a country to have more of the commodi- 
ties of life within its borders than its people know what to do 
with. 

62. The essential character and plausibility of the labor- 
fallacy may be shown by the following illustration. A farmer 
is carrying hay to market. The county authorities prepare 
for him a very fine smooth road. It is obvious to him 
that the better his horse pulls the more hay he will get to 
market. A stranger meets him on the road and finds him 
applying this principle by lubricating his wheels with sand in- 
stead of oil. Inquiring the motive of this ingenious device, the 
stranger is asked whether he can deny that the better the horse 
pulls the more hay he will get to market. 

The stranger is not prepared to deny this principle. 

" The more sand I put on my wheels the better I find my 
horse to pull." The stranger cannot deny this either. 

" Therefore it is an undeniable conclusion that the more 
sand I put upon my wheels the more hay I will get taken to 
market." 

The student can have no more instructive exercise than that 
of framing a series of ingenious devices by which the farmer 
could baffle every argument of the stranger to prove that this 
position was unsound. He could show that his neighbor, who 
put oil on his wheels, had a very poor miserable horse, while he 
himself had a strong and sound one, and all the result of the 
exercise he was thus enabled to get by the sanding policy. He 
could taunt the stranger with being the agent of some oil-mer- 



IV. 62.] OF ECONOMIC FALLACIES. 423 

chant who wanted him to buy oil in lieu of the lubricant which 
he could have for nothing on the wayside. He could demand 
if the stranger ever knew a case in which a horse that pulled 
well got less hay to market than one that did not pull at all. 
He could cite the case of a fellow-farmer who had been using 
oil and whose horse got so frisky and pulled so light a load that 
he ran away and destroyed the hay-cart and broke the farmer's 
leg. 

The corresponding reasoning in the case of the laborer is 
simply this : 

The more my labor is in demand the more perfectly my 
family will be supplied with the necessaries of life. 

But the greater the need I create for my labor the more it 
will be in demand. 

Therefore I advocate a policy which will make people need 
my labor. 

So the dealer tries to make clothes as scarce and dear as pos- 
sible in order that everybody else, mechanic, laborer, hod-car- 
rier, merchant, and man of business, may be in greater need of 
clothes. The carpenter, bricklayer, and plasterer want houses 
to wear out as fast as possible, that the public need for houses 
may lead to their employment. The manufacturers of copper 
and iron want to cut off the foreign , supply of their product, 
that the public may be in greater need of it. The cooper wants 
barrels made scarce, that the public may be in greater need to 
employ him. Thus the individual efforts of every man to col- 
lect the largest supply of the necessaries of life is accompanied 
by a general feeling throughout all society that other people 
ought to continue in need of these necessaries. 

It goes almost without saying that no man ever applied the 
principle in his own individual case. We never heard of a man 
who, through some miscalculation, had bought more clothes 
than he could wear, throwing them away or burning them in 
order that he might have an inducement to buy more. 

We have mentioned examples of these fallacies in a few of 
the many forms in which we daily see them in the newspapers, 



424 THE SOCIETABY CIRCULATION. [IV. 63. 

in the speeches of Congressmen, the resolutions of labor and 
socialistic meetings, and tacitly and by implication in the re- 
strictive rules of trades-unions. In some of these examples the 
fallacy will be obvious enough to the reader. In others he may 
find it to need illustration. We may take as a typical average 
case that of a house which is burned down. By this accident 
the owner is undoubtedly injured ; but are not carpenters, 
bricklayers, and plasterers thereby benefited, either to a degree 
equivalent to the loss of the house, or at least to an apprecia- 
ble fraction of it ? We answer, No. It is true that these indi- 
vidual mechanics who may be employed to build the house may 
be benefited in a slight degree, but, as has already been shown, 
the demand for labor is not increased by the destruction of the 
house. The sum which the owner is now to spend in the em- 
ployment of bricklayers, carpenters, and plasterers would, had 
the house remained, have been expended by him, or by those 
from whom he is to borrow the money, in the employment of 
labor in other forms. The demand for labor which is thus 
gained in one direction is lost in another direction, and one 
class gains at the expense of another. On the other hand, the 
owner of the house has lost its whole value, and, on the whole, 
the total loss to the community is measured by that of the 
house. • 

63. Special Consideration of the Money Fallacy. The 
fallacy which we have now to consider in detail, although from 
the same root as the labor fallacy, has little in common with it, 
and has an entirely different history. The labor fallacy may 
be described as affecting the great mass of the community in a 
mild form, and as not varying much from year to year or from 
generation to generation. The money fallacy, on the other 
hand, is periodic, overwhelming us, not at regular intervals, but 
from time to time, owing to the influence of changing events. 
The Americans more than any other people have been its vic- 
tims. It was at its height during the ten years following the 
outbreak of the Civil War. During the decade following it 



IV. 63.] OF ECONOMIC FALLACIES. 425 

greatl y subsided ; and at the present time, although shared by a 
large party, is not doing serious damage. Yet it is constantly 
latent in human nature, and therefore liable to break out at any 
time after the disastrous effects of the policy it gives rise to on 
one generation have been forgotten by the succeeding one. It 
is therefore one which the student of economics should thor- 
oughly understand. It consists in considering the monetary 
unit which we call one dollar as an absolute measure of value, 
deriving its existence and its value from law. 

During the years 1862 and 1863 our government issued 
hundreds of millions of legal-tender notes to circulate as money. 
The result was a gradual but continual rise in prices, until the 
great body of things which people had to buy cost twice as 
much as before. Wise men said the dollar was depreciated to 
one half, but the public said the paper dollars were as good as 
any other dollars because they performed all the functions of 
dollars. No one had any difficulty in passing off all the money 
that he received, and having it accepted as that number of 
dollars which it pretended to be. Money, it was reasoned, was 
only the medium of exchange. A man gets it by selling only 
that he may buy with it ; and if he can do this, what more 
is wanted ? 

The reply is : One very important thing more is wanted! He 
must not only be able to buy with it, but he must be able to buy 
a dollar's worth. The other replies, But he does get a dollar's 
worth. A dollar's worth is exactly what a dollar will bring, 
and he certainly gets that. You cannot enforce any law pre- 
scribing how much a dollar shall bring. 

The economist admits all this, but yet claims that something 
is wanting. Although the man who takes a dollar cannot have 
any authoritative and legal understanding as to how much he 
can buy with that dollar next week or next year, yet he does 
want to feel a reasonable assurance that he can buy as much 
with it then as he can now. If he builds a house, neither the 
builder nor the law itself can guarantee him against the house 
being demolished by an earthquake, unroofed, burned by a fire, 



426 THE SOCIETARY CIRCULATION. [IV. 63. 

or worn out by the action of the weather. But because he 
cannot have such a guarantee, it does not therefore follow that 
he should not care how combustible the materials are and how 
poorly the house is built. Notwithstanding the impossibility 
of the guarantee, he wants a house that will probably be as good 
next year as it is this, and which will endure for the use of his 
children and grandchildren. 

.Now, it is the same with a dollar. If he foresees a reasona- 
able probability that a year hence his dollar will only buy him 
the tenth part of a dinner, then it can no more fulfil the func- 
tions of a dollar with him than the house which is sure to 
decay in a year can fulfil the functions of a house. He wants 
a dollar which will buy as good a dinner next year as it will 
now, and which, if he invests it, will buy as good a dinner for 
his grandchildren as it will for him. If Congress is to furnish 
him the dollar, the impossibility of an absolute guarantee of 
this sort does not justify the issue of a dollar which it is cer- 
tain will not fulfil the required conditions. 

The fallacy on which all this difficulty rests is that of looking 
upon the dollar as an absolute standard of value. During the 
period above referred to a gold dollar was worth two or more 
dollars in paper. This was a state of things which many in- 
telligent people had a difficulty in understanding, and which 
they attributed to the machinations of speculators. They rea- 
soned that both the gold and silver dollars derived their value 
from laws of Congress, and were declared of equal value by 
this authority. Therefore the value must really be the same, 
although in "Wall Street and at the banks they were considered 
different. The answer to this is that a dollar is not a stand- 
ard of value in any other sense than a foot is. If Congress 
should legalize two different lengths and declare each of them 
a foot, that would not make them equal. If it should direct 
the foot measure to be made of a kind of material which would 
shrink in a few days to one half its length, yet although this 
measure might be called a foot, it would not be of the same 
length. In declaring anything one dollar Congress only gives 



IV. 63.] OF ECONOMIC FALLACIES. 427 

it a name, but does not give a value. The principle involved 
may be expressed as follows : Calling an object one dollar, and 
declaring it a legal tender for that amount, no more gives it a 
definite value than declaring apiece of metal to he a foot gives 
it a definite length. 

We qualify the word value here by the word definite, be- 
cause, as we shall hereafter see, this proposition is subject to an 
important limitation. Thus the difficulty which men experi- 
ence in understanding how there can be two values to the dollar 
is as absurd as a difficulty in seeing how two different lengths 
could each be one foot. The reason why a difficulty is felt in 
the one case which is not felt in the other is that length is 
something which can be made evident to the eye, while value 
is not. The inequality of two foot measures is made evident 
by merely putting them together and seeing how they look. 
The inequality of two dollars can be shown only by going into 
the public market with them and seeing how much they will 
respectively buy. Even then the inequality is manifest only to 
the eye of reason and not to the eye of sense. 

Connected with this notion is the belief that the dollar de- 
rives its value from the government stamp upon it. This 
belief admits of a test so simple that it is wonderful how it can 
acquire the currency it does. Were it correct, a coin might be 
vastly more valuable than the bullion out of which it was made, 
and the excess of value would depend on the greatness and 
power of the nation by which it was stamped. But, as a mat- 
ter of fact, leaving out the expense of minting, and the excep- 
tional cases of fractional currency, the value of any coin is 
exactly that of the bullion from which it is stamped. The 
dollars of the poorest South American states, the sovereigns of 
England, and the uncoined gold bars fresh from the mines, all 
exchange in the markets of the world according to the amount 
of gold or silver in them. 



428 THE SOCIETARY CIRCULATION. 

ILLUSTRATIONS. 

1. Illustration of the Labor Fallacy. ' ' Have you ever witnessed the anger 
of the good shopkeeper Jacques Bonhomme when his careless son happened 
to break a square of glass? If you have been present at such a scene you 
will most assuredly bear witness to the fact that every one of the spectators, 
were there even thirty of them, by common consent, apparently, offered 
the unfortunate owner this invariable consolation : ' It is an ill wind that 
blows nobody good. Everybody must live, and what would become of the 
glaziers if panes of glass were never broken? ' Now, this form of condolence 
contains an entire theory which it will be well to show up in this simple 
case. . . . Suppose it cost six francs to repair the damage ; we say that the 
accident brings six francs to the glazier's trade — that it encourages that trade 
to the amount of six francs. I grant it. I have not a word to say against it. 
You reason justly. The glazier comes; performs his task; receives his six 
francs; rubs his hands; and, in his heart, blesses the careless child. All 
this is that which is seen. But if, on the other hand, you came to the con- 
clusion that it is a good thing to break windows, that it causes money to 
circulate, and that the encouragement of industry in general will be the 
result of it, you will oblige me to call out, ' Stop there; your theory is con- 
fined to that which is seen. It takes no account of that which is not seen.' 

" It is not seen that as our shopkeeper has spent six francs upon one thing 
he cannot spend them upon another. It is not seen that if he had not had 
a window to replace he would perhaps have replaced his old shoes, or added 
another book to his library; in short, he would have employed his six francs 
in some way which this accident has prevented. 

" Let us take a view of industry in general as affected by this circum- 
stance. The window being broken, the glazier's trade is encouraged to the 
amount of six francs; this is that which is seen. 

"And if that which is not seen is taken into consideration, it will be un- 
derstood that neither industry in general nor the sum total of national 
labor is affected, whether windows are broken or not. 

"If the window had not been broken, the shoemaker's trade (or some 
other) would have been encouraged to the amount of six francs: this is that 
which is not seen. 

"Now let us consider Jacques Bonhomme himself. In the former sup- 
position, that of the window being broken, he spends six francs, and has 
neither more nor less than he had before, the enjoyment of a window. 

" In the second, where we supposed the window not to have been broken, 
he would have spent six francs in shoes, and would have had at the same 
time the enjoyment of a pair of shoes and of a window. 

"Now, as Jacques Bonhomme forms a part of society, we must come to 
the conclusion that, taking it all together, and making an estimate of its en- 
joyments and its labors, it has lost the value of the broken window." — 
F. Bastiat, translated by Mrs. Faiccett. 



ILL TJSTRA TIONS. 429 

2. Illustration of the Money Fallacy. The following was written before 
the resumption of specie payments, at a time when the country had not re- 
covered from the financial notions produced by the Civil War : 

In the world of business "credit" includes the ability and the obligation 
to pay all demands in cash as they become due. A man or a firm that can- 
not do this has no credit, however excellent it may be in other respects. 
Suppose you should be travelling in a distant city and, going to the cashier 
of your hotel for change, he hands you a ten-dollar bill on the banking firm 
of Spread Brothers & Company. 

"Are you sure this bill is good ?" you inquire. "Good as gold, sir. 
The firm of Spread Brothers & Co. is the greatest in this State, possessed of 
unbounded wealth, and its operations extend over the whole globe." 

"Then," you reply, "I suppose if I take this bill to their counter, they 
will pay it? " 

"Pay it? Why, no, sir. You would be hooted by the small boys in the 
street and laughed at by Spreads' clerks. The credit of the firm is so ex- 
cellent and all its debts so well secured by real estate and bonds worth 
millions of dollars that both the firm and the community concluded ten 
or twelve years ago that there was not the slightest need of their redeeming 
their bills, and they are never going to do it." 

" I don't understand that kind of credit. In my State, credit paper is 
something which the party issuing is bound to pay when required; and if 
he does not pay, he has no credit, no matter how rich he is." 

"Of course twopenny firms must pay. But we claim that a firm so 
great, so powerful, and so wealthy as that of the Spreads need not pay." 

"Well, sir," you would reply, " I don't see what difference it makes to 
me how wealthy Spreads' firm is, or how well their paper is secured, if I 
cannot get any of their wealth in exchange for my bill. I always thought 
the advantage of having the paper of a wealthy firm was that it was sure to 
be paid; but if the richer the firm the less the need of paying, I would 
rather have the bill of some smaller house." 

"Ah, you know nothing about finance, I see, and I will get you some 
foreign money rather than argue further with you." 

If a hotel cashier should talk in this way to you, you would be a little 
puzzled to say whether he was joking or in earnest: and yet great statesmen 
do argue in just that way about our greenbacks. There are bills to the 
amount of four hundred millions of dollars afloat, reading, "The United 
States will pay the bearer — dollars." Yet if you should take one of 
these bills to the government's counter asking that this promise be redeemed, 
the clerks would laugh at you. A year or two since some one did this very 
thing, and the newspapers speculated on the man's sanity, while a Treasury 
official thought he was only trying to make himself notorious. If a politi- 
cian tries to justify permanent non-payment, he will talk about the credit 
and wealth of the nation exactly as the hotel clerk talked about Spread 
Brothers & Co. — The A B C of Finance, by S. Newcomb. 



430 THE SOCIETARY CIRCULATION. 

3. An apt analogue of the money fallacy may be constructed by supposing 
that the people of St. Louis deemed it greatly to their interest that the 
flow of the Mississippi should be increased. Let us suppose that in order 
to bring this about they erect powerful machinery which is to turn im- 
mense paddle-wheels whose blades dip below the water and project it 
down the river. As each wheel turns it causes a great rush of v/ater 
from it, and thus an apparent increase in the flow. If we could imagine 
a person with as little idea of the flow of the river as a mathematical 
quantity as the ordinary man has of the industrial flow, as such, we may 
see how strong the impression such a person would have that the flow of 
the river is really increased by the machinery. His eyes show him the 
rush and foaming of the water wherever the machine operates, while the 
tide goes on, apparently the same as before, wherever it does not operate. 
The way in which we should show this man the error of his views is also 
analogous to that which we have employed in showing the monetary fallacy. 
We should say to him: 

"The flow of the river past your city is necessarily equal to the sum 
total of the water which comes to it from the mountains. Your machinery 
cannot possibly change the streams from the mountaius, and therefore it 
cannot change the flow of the river. True, there is, as you say, a greater 
flow where your wheels act; but this is necessarily accompanied by a 
diminution of the flow in the great masses of water below, which you do 
not see." 

The reason why a mistake such as this is so common in the case of 
economics and not possible in the case of the river is that in the latter the 
mind can form a conception of the real state of things without special 
training, while in the former it cannot. If we imagine a person spending 
his life in managing the supposed paddle-wheel and seeing the rush of 
water from it, without ever forming any conception either of the magni- 
tude of the river or of the source of its waters, we see how naturally he 
might be gradually led to believe that the flow of the river depended on 
his machinery. But this person would be in the same state of mind as 
the average man in relation to the course of trade and industry. In show- 
ing the latter the true relations of things we do for him what we should 
do for the supposed man in showing him the source and magnitude of 
the river. 

EXERCISES. 

1. Consider the following ways in which a man may gain wealth, and in- 
vestigate in each case whether his gains are to be regarded as additions 
made by himself to the total wealth of the country without being detri- 
mental to the rest of the community, how far they are made at the expense 
of particular individuals with whom he may have had dealings, and how 
far as made at the expense of the community in general : 



EXERCISES. 



431 



I He bets with a broker about the future price of stocks, and wins. 

II He invests in stocks and bonds, which rise in price in consequence of 
increased prosperity of the railways and manufacturing companies which 

^m H^'invents a new method of boot-making, and employs a great body 
of artisans in making boots by this method at a profit to himself. 

IV He bo rrows money and builds a railway, the dividends of winch pay 
all the interest on his debt and yield him a large additional income. 

V He patents a new sewing-machine, which turns out to be a great 

mioccss 

VI He discovers and buys a valuable mine. 

VII He sets up a large grocery-store, and manages to sell so cheaply as to 
attract all the customers from a great number of other stores, and compel 
flip latter to retire from business. 

VIH He discovers an excellent silk-maker in the interior of France, buys 
his products, and sells them at a profit in New York. 

2 Consider also whether, in any of the preceding cases, the community 
attge necessarily gains, as well as the man who makes the money, and 
in what their gains consist. [Apply the principles of Chaptei V.] 

3 Show that it is impossible for a nation to adopt such a policy that 
ther"e shah be anv great continuous and unceasing increase in its stock of 

he PV cious metais "and that the general world's stock of those metals tends 
lo distribute itself among all nations in proportion to their need for using 
them as money. 

4 Explain how it is that in a very poor community the volume of the 
cutely Hn a yet smaller proportion than the volume of business trans- 
acteT [This involves the conclusion that the rapidity of circulation is 
greater in such a community. Cf. Chap. II.] 

* Tn a new country, where the rate of interest is high, people are most 
, nttoblrrowmoey Suppose wealthy foreigners to loan them all 
£"Td nd slvl they wanted P but with the enforced stipulation that 
n"ne S of it snou!d be exported: what would bethe economic effect upon 
the community? Would it be materially beneficial? 

ft Suooose the loan made without stipulation: what would the com- 
mumfydo' with the money ? What would determine the benefit they would 
derive from it ? 

7 From your answers to the two preceding questions explain what is 

reallvdTewhen foreigners invest capital in a country where the rate of 

ntresUs high. Does'the act of investment commonly -con.* » ^ndmg 

money thither? If so, what becomes of the money? If not, what is sent. 

Note In all such questions as these it will assist the student to begin 
with Tsimple concrete case. For example, suppose that in the new country, 



432 TEE SOCIETARY CIRCULATION. 

Colorado for example, a great profit can be made by working a mine and 
building a railway to it. So a Colorado banker offers ten per cent per an- 
num interest on all money borrowed. One London capitalist loans him 
$10,000, which he ships as gold, and another sends him a cheque on his 
London banker for £2000. Trace out what the Colorado people will do 
with the gold and the cheque, drawing a diagram of the monetary and in- 
dustrial operations to which the loans give rise. 

8. Suppose that during the Civil War our government had adopted the 
policy of preventing the Southern States from importing anything but gold 
and silver, but had allowed them to export anything they pleased: what 
would have been the effect upon the price of commodities within their 
limits, and upon the power of the Confederate Government to prosecute the 
war? 

This presupposes the blockade modified to this extent : that no ship 
would be allowed to enter the Southern ports if she carried anything except 
gold and silver, but she might carry in as much of these metals as she chose. 

On leaving the port no restriction is supposed to be placed upon what she 
carried out. 

If one should answer the foregoing question in this way : Gold and silver 
are the sinews of war, and hence the free introduction of these articles 
would have increased the power of the Confederate Government to carry 
on the war; — would he be correct? 

If one should answer it by saying this policy would have been demoraliz- 
ing to the Confederate Government by acting as a bribe to the people to 
expend all their energies in raising cotton for export, instead of employing 
them in war, would he be correct? Could the importation of anything 
which could not produce either sustenance or munitions of war help a 
people so situated ? 

It is essential to a complete discussion and conclusion on this subject that 
the student should consider to what extent the Confederate Government 
could have got possession of the gold imported. This action would have 
depended upon their power to get possession of the cotton or other goods 
exported; this, again, would have depended principally upon the willingness 
of the planters to raise cotton, not for their own benefit, but for that of the 
government. 

9. The inhabitants of a city conclude that hack-drivers are an exception- 
ally meritorious class of citizens, and so resolve to expend all their surplus 
income in hack-hire. Are hackmen going to be permanently benefited? 
What will be the economic effect? (Cf. III. 35 and Bk. IV., Chap. VI.) 

10. Are we to regard the consumption of commodities as productive of 
any benefit to the producers, or is that benefit confined to the consumers? 
For example, are we to regard an increased consumption of tea as benefi- 



EXERCISES. 433 

cial to grocers? As beneficial to the inhabitants of China? Explain why 
the answer is not the same in all cases. 

11. Trace the economic effect of the frugal New England population put- 
ting their money into savings banks. "What do such savings really consist 
in? 

12. Show the relative advantages to a spendthrift of living in a frugal 
and of living in a free-spending community. Define the difference between 
two such communities. 



28 



434 THE SOCIETARY CIRCULATION. 



APPENDIX TO BOOK IV.— THE RELATION OF DEMAND FOR 
COMMODITIES TO DEMAND FOR LABOR. 

It is the plan of the present work to present to the reader in the first four 
books only such a body of doctrine as is generail} r accepted by all economic 
reasoners who have completely mastered the subject, and thus to avoid 
breaking the current of thought by arguments and discussions on contro- 
verted points. But the theory of the employment of labor which has been 
presented in the preceding chapters may form an exception to this rule. 
This theory is, in one point, in apparent discord with certain views held 
by the best economic reasoners of the time. This discord can be settled 
only by a very careful analytic comparison of the hypotheses and conclu- 
sions of the two theories. 

The gist of the view which has been laid down iu the present work is this: 
That, so far as the current rate of wages and the immediate interests of 
society at large are concerned, it makes little or no difference whether the 
owner of money expends it in one direction or another; and that the real 
point on which the remote interests turn is whether the spender employs 
his money for an object terminating in his own gratifi6atiou, or in an ob- 
ject involving an increase in the wealth which can be commanded by society 
at large. As special examples : 

I. If the manufacturer of cloth buys wool and other materials with a view 
of enlarging his production; if a farmer buys manure to increase the fer- 
tility of his field, or a plough and team of horses to cultivate a new field, 
then he will ultimately benefit society by placing at its disposal a larger or 
better supply of cloth and wheat. 

II. If I employ men as outriders for my carriage, or servants to wait upon 
me, I render no benefit to society, but leave the account even. But if I em- 
ploy these men in making cloth or raising wheat, then I benefit the rest of 
society by placing at its disposal larger or better supplies of food or clothing. 

III. If I have been in the habit of spending a thousand dollars of my in- 
come annually in clothing myself in fine velvet, and I change my mode of 
expenditure by giving up the velvet and spending the money in paying a 
man to sing and dance for me, I merely change the direction of a certain 
portion of the industry of the country from the work of making velvet to 
the work of dancing for me, and the interests of society at large remain un- 
affected by the change. 

The other theory, which is not necessarily in opposition to the above 
views, but which is often supposed to be, is very fully developed by Mr. 
John Stuart Mill, in his Political Economy, Book I., Chapter V., §9, and 
also by Mr. J. L. Laughlin, in his abridged edition of Mill, pp. 87-92. It 
is embodied in the maxim that "a demand for commodities is not a de- 
mand for labor." "We must understand the meaning and application of 
this maxim before we can make any comparative analysis of it. Taken 



DEMAND FOB COMMODITIES, ETC. 435 

literally it is undoubtedly correct, as has in fact already been shown. 
Buying things does not make them. When the ownership of a great 
factory is transferred from one company to another, the conditions of pro- 
duction are in no wise altered. The producing ability of society at large is 
the same after a bale of goods has been sold as it was before. All that 
mere buying and selling consists in is the transfer of rights, powers, and 
duties from one person to another, and not the production of such rights, 
powers, or duties. 

Has this fact any necessary antagonism to the theory which has been 
hud down? I think not. It is rather certain corollaries drawn from it that 
are in antagonism to it, and it is with these corollaries and not with the 
maxim itself that we shall be concerned. 

If we regard the theory as a complete one, which some economists do, 
then the question whether one does or does not benefit labor by his expen- 
diture turns entirely upon whether he purchases goods or employs labor, 
and does not depend upon the kind of goods he purchases or the work 
which he employs the laborers to do. Now, this conclusion admits of a very 
easy reductio ad absurdum. The farmers of the country employ a great body 
of laborers every winter, spring, and summer in sowing, cultivating, and 
harvesting crops. If we conclude that the main question is not, "What 
shall we employ our laborers in doing ? " let us suppose that the farmers 
employ them as liveried servants to drive their carriages and wait on table, 
leaving all the crops unharvested. It is perfectly clear that society at 
large will suffer by such a policy. It must be therefore that some other 
question than that of "demand for labor versus demand for commodities " 
comes into play. 

This reductio ad absurdum proves that the theorem is not complete, but 
does not disprove it in all its applications. The direct issue between the 
two applications may be seen in the following propositions. The doctrine 
of the present work is : 

If in lieu of clothing myself with fine -velvet, I expend the same income in 
paying a man to dance for me the year round, I merely change a certain 
amount of the industry of the country from the work of making velvet to the 
work of dancing, and the interests of society at large are unaffected by the 
change. 

The opposing reply of Mr. Mill is: No, you do more than this : you trans- 
fer a certain portion of your consuming power from yourself to the dancer; 
and you direct a certain portion of the industry of tlie country from the work 
of supplying yourself with velvet to that of supplyiny your dancer with food. 
You thus confer a positive benefit upon society at large by increasing the manu- 
facture of food in compensation for which you have given up wearing velvet. 

The comparison of these opposing views requires us to enter upon some 
minute and somewhat intricate considerations. There is a certain advan- 
tage in the direct employment of the dancer, inasmuch as he gets the entire 
benefit of my expenditure, whereas, when I buy the velvet, the great armies 



436 THE SOCIETARY CIRCULATION. 

of men who were directly or indirectly engaged in producing that velvet do 
not get all the benefit of my money, because a certain portion of it is absorbed 
in the cost of making the numerous exchanges ■which have come into play. 
Therefore, could we do away with the labor of exchange, we might employ 
the men now engaged in buying and selling in the sole labor of producing, 
and thus society at large would be a gainer. Thus, in so far as labor of 
exchange is saved, Mr. Mill's view has a certain amount of correctness. 

But practically can we make any alterations in the ratio of the number 
of men engaged in actual production to those engaged in exchange? Prac- 
tically no such saving in exchange appears to be possible. The proportion 
of the community which has to be engaged in the work of exchange is fixed 
by the conditions of the country and of trade, and cannot be altered on 
any considerable scale. 

Returning now to the main question, we have to begin by recalling sev- 
eral preliminary propositions, which must be accepted by all who really 
understand the case, and which we shall therefore not stop to establish. 

I. The typical laborer is one who has not accumulated any considerable 
amount of wealth for himself, and must therefore depend for his support 
upon the capital of others who pay him for his services. 

II. The wages which he receives may all be expressed in terms of food, 
clothing, and shelter, for which we may use the general term sustenance. If 
he is paid in money, we may regard this money as an order on society to 
supply the laborer from its storehouse with the equivalent of the money in 
sustenance. Thus the laborer is to be regarded as an agent producing sus- 
tenance and at the same time consuming it. 

III. The benefit of his labor to society at large, and especially to other 
laborers, depends upon his producing for other laborers an amount of sus- 
tenance equal or superior in quantity or quality to that which he himself 
consumes. That is, as he eats his daily bread and wears out his clothes, 
and as the house in which he lives is going to decay, he must by his 
labor produce more than an equivalent in some form of clothing, food, or 
houses for his fellow-laborers. 

IV. We can therefore measure the benefits rendered to laborers at large 
by any economic cause by determining whether that cause results in a 
greater production of sustenance for laborers. 

The counter-proposition of Mr. Mill is now tested by considering the 
relative situations and activities of the spender of money, and the maker 
of velvet or body of makers, and a dancer or body of dancers, in the follow- 
ing Avay: 

We have a first agent A (Fig. 8), comprising a body of men who receive 
the stream a frOm society and have been spending it upon fine velvet bought 
from the velvet-maker V with the equal stream b. The velvet-maker V has 
a capital, and a body of operatives to whom he pays the stream of wages c. 
The stream d purchases subsistence for the operatives. 

A time now comes when A gives notice to V that after his present orders 



DEMAND FOB COMMODITIES, ETC. 



437 



are filled he will want no more velvet, and in- lieu of spending his money on 
velvet he will spend it on men to dance for him. To make the cases in every 
respect equal, we may assume that he will want a theatre equal in value 
to V's fixed capital, and that V can transform his capital into the required 
theatre. Such are the fundamental hypotheses common to the two theories. 
Now, according to the view laid down in this book, the Tesult of this action 
on A's part will be that V will say to his men : " The demand for velvet will 
cease; I can therefore no longer employ you in making velvet. But A, my 
customers, will want dancers; I am going to build them a theatre, and you 
can dance for them at the same wages I have been paying you." The result 
will be that shown in Fig. 9. A receives the same monetary flow a from 





Dancers] Q 



Fig. 8. 



Ftg.9. 



society. He pays one flow to V, the former velvet-maker (now a manager 
of his theatre), and another to a body of dancers who were formerly opera- 
tives. Thus the sole change is that V and all his operatives have gone out 
of the business of making velvet into that of dancing. Society at large is 
unaltered by the change, whichever way it occurs, because all it knows of 
the matter is that it supplied food to the total number of operatives em- 
ployed by V, and when they take to dancing, the supply and the money 
they pay for it remains just the same as before. 

According to Mill's view, the change in A's expenditure will work in this 
way: When A advises V that he is going to stop wearing velvet, V will say 
to his operatives: "I can no longer employ you in making velvet, because 
the men A who have been buying my velvet are going to stop wearing it. 
But these men are going to employ dancers to dance for them, and those 
dancers will want sustenance. Therefore, instead of employing you in 
making velvet for A, I am now going to employ ycm in making sustenance 
for A's dancers." In other words, the velvet-makers, instead of responding 
to A's demand, "We want dancers," will respond to the demand of his 
dancers, " We want sustenance." 



438 THE S0C1ETABY CIRCULATIONS , ^ 

This supposed state of things is represented in Fig. 10. The stream a i 
instead of passing from A through V and O to society, as in Fig. 8, now 
passes from A to D in payment for dancing. Thence it passes from D to 
O in payment for the sustenance which V and O are now making, and from 
this point we have the same draft on society as before. 

Mr. Mill's conclusion is that a certain portion of the industry of the 
country performed by V and O has been changed from the work of making 
velvet to the work of making sustenance for D. Thus the production of sus- 
tenance is increased, and thus, in accordance with the principles laid down, 
laborers are benefited. Thus we have two apparently contradictory results 
well made out, of which only one can be really true. Which is true? Are 
we to regard Fig. 8 as changed into Fig. 9 or into Fig. 10? 

A very little consideration will show us 
one essential difference. In Fig. 9 we are 
dealing with absolutely the same body of 
persons as in Fig. 8, namely, a spender or 
body of spenders A, a body of velvet-mak- 
ers V and O, and society. 

Thus the comparison is made with the 
same persons. 

Now, supposing Fig. 8 to change into 
Fig. 10, we bring into consideration a new 
body of men, D. Now, A did not make 
^ [sustenance) these men on the spot to dance for him; 

and even if he could do so, society would 
FigTio not ^e benefited, because the streams to 

and from society are precisely the same in 
Fig. 10 as in Fig. 8. Very clearly, before we can decide whether Fig. 10 is 
more favorable to society at large than Fig. 9, we must know what these men 
D were doing in Fig. 8. It is at this point that the writer takes exception to 
Mill's theory. It withdraws from society and brings upon the scene a new 
body of men, D, and at the same time brings in an increase of subsistence 
for the support of these men. It therefore proves nothing. We can con- 
clude nothing until we know what the men D were doing in Fig. 8, where 
they form a part of society. Now, we may make two hypotheses — that 
they were employed in Fig. 8, or that they were for the time being unem- 
ployed. If we take the most popular hypothesis, we shall undoubtedly 
suppose thern to be unemployed. 

There are constantly in the whole country a body of unemployed men, 
ranging from a few thousand to perhaps half a million, or, we may say, one, 
two, or three per cent of the whole population. The popular economy 
holds these men up to view and informs us that if we will, by increasing the 
volume of the currency or taking some other measures, find employment 
for them, all will be well ; and it tacitly assumes that thereafter nobody will 
be out of employment. As a matter of fact we have shown that this body 




DEMAND FOB COMMODITIES, ETC. 439 

of unemployed men is of the same general magnitude, and subject to the 
same kind of fluctuations, no matter what system we adopt, and that it is 
inseparable from the ordinary fluctuations in production and consumption. 
We cannot therefore look upon D as representing a permanently unem- 
ployed class to whom we have given permanent employment. All we have 
done is to take out of society, in imagination, a body of men D, and thus 
to deprive society both of their producing and consuming powers. Their 
consumption, which formerly came from society, now comes from V; that 
is, the increased amount of food produced by V is the economic equivalent 
of the sustenance which D produced when a part of society as in Fig. 8. We 
have simply changed the occupation of D from that of production in general 
to dancing, and the occupation of V and O from that of producing velvet 
to that of producing sustenance. Thus the interests of society at large re- 
main unaltered. 

It therefore appears that the logical conclusions are the same even when 
we adopt Mr. Mill's theory of the change. It is therefore unnecessary to 
decide whether the outcome of the change is represented by Fig. 9 or 
Fig. 10. 

The case of Fig. 10 illustrates the way in which Mr. Mill and his dis- 
ciples prove their theory. They bring upon the stage a body of unem- 
ployed men and show that though these men should be surrounded by a 
crowd of customers crying, "We want velvet," " We demand such food as 
you know how to make," and offering them money for the velvet and the 
food, yet this demand would not be of the slightest use to the men, who 
could be employed only by some one offering them wages to go to work, 
and finding the necessary capital for that purpose. 

If this is true and obvious, as of course it is, why devote so much atten- 
tion to refuting the deductions from it? I reply, because the fact is falla- 
ciously used to set aside one of the most fundamental principles of eco- 
nomics. A single example will suffice. It was shown in Chapter VIII., 
preceding, that labor-saving machinery cannot diminish the sum total of 
demand for labor, because all the money saved goes into the market to 
purchase other products of labor. Mr. Mill says of this theory: 

"This is plausible, but involves a fallacy; a demand for commodities 
being a totally different thing from demand for labor. It is true, the con- 
sumers have now additional means of buying other things; but this will not 
create the other things, unless there is capital to produce them, and the im- 
provement has not set at liberty any capital, even if it has not absorbed 
some from other employments. The supposed increase of production and 
of employment for labor in other departments therefore will not take 
place; and the increased demand for commodities by some consumers will 
be balanced by a cessation of demand on the part of others, namely, the 
laborers who were superseded by the improvement, and who will now be 
maintained, if at all, by sharing, either in the way of competition or of 
charity, in what was previously consumed by other people." 



440 TEE SOCIETARY CIRCULATION. 

Any one who has mastered the theory of the demand for labor set forth 
in Chapter VI., ante, should be able to grapple with what seems to the 
writer a totally groundless conclusion. It is true that the act of buying 
commodities with the money saved by the machinery does not, in itself, 
employ labor. But it transfers the employing power to the seller of the 
commodities, and, even if the latter transfers it to another, it must after a 
very few transfers reach laborers as wages, and then the result is the same 
as if the saver had employed labor with it in the first place. 

Mr. Mill's reasoning in fact seems to involve the conclusion that if the 
crowd of men whom we have pictured as surrounding the unemployed 
laborers and crying for velvet which they could not furnish should go to all 
the velvet manufacturers within reach, and buy out for cash all their stock 
on hand, as well as give them orders at double prices for all they could 
make during the next year, that course would not give employment to one 
of the unemployed men. No matter how fabulous the sums offered and 
paid by the men hungry for velvet, their demand is only for a commodity, 
and therefore does not set free any new capital for the use of the velvet- 
makers, and so the latter cannot employ any new men. 



BOOK V. 
APPLICATIONS 



OF 



ECONOMIC SCIENCE 



BOOK ¥.— APPLICATIONS OF ECONOMIC 
SCIENCE TO QUESTIONS OF POLICY. 



CHAPTER I. 

THE LET-ALONE PRINCIPLE. 

1. Most questions of governmental policy cluster around 
one central maxim, founded on what is sometimes called the let- 
alone principle. This maxim was enunciated by the Physio- 
crates, a school of French economists and philosophers which 
arose early in the last century. Its familiar form was, Laissez- 
aller, laissez-faire ; which may be freely paraphrased, " Let 
things take their own course." It was directed against the sys- 
tem, which was then almost universal, of governmental inter- 
ference with the freedom of intercourse between nations 
and individuals. It opened up a new line of thought, founded 
on the consideration that the individual man was a being better 
able to take care of himself, in bargaining with his fellow-men, 
than any government was to take care of him. We have to 
consider what the maxim means, on what grounds it rests, to 
what limitations it is subjected, and what are its relations to 
the progress of society. 

Since the maxim is directed against interference of govern- 
ment with the individual, we must begin by considering the 
relations of these two parties. We may consider government 
in this case as the instrument for the combined action of society 
at large. Thus the relation of the individual to government 
means his relation to society ; that is, to all his fellow-men. In 
this connection we must remember that society can be nothing 



444 APPLICATIONS OF ECONOMIC SCIENCE. [V. 2. 

more than an aggregate of individuals, and can have no inter- 
ests separate from the interests of individuals. It would be a 
contradiction in terras to talk about a society which was wealthy 
and prosperous while its individual members were poor and 
starving. 

We may consider the maxim as expressing either a policy 
or a principle. Considered as a policy it claims that govern- 
ment should not interfere with the rights of individuals, or bodies 
of individuals, to direct their industry into sucli channels as they 
may deem best, and to make such contracts with their fellow- 
men as they may deem mutually advantageous. The principle 
or law embodied in the policy is that non-interference on the 
part of the government is best for the progress of society, so 
far at least as the operations of its wealth-producing powers are 
concerned. These two views of the maxim are practically 
equivalent, because it is only on grounds of general good that 
government can be required to abstain from interfering, and 
thus the principle and the policy necessarily go together. 

2. Economic Significance of Laissez-faire. Like all other 
very general principles in social science, the let-alone principle 
may have a very wide range of meanings and applications. In 
order to treat it definitely it is necessary to distinguish between 
these applications, and to find in what its economic significance 
consists. Taken in its widest possible range, it is sometimes 
interpreted as meaning that every man should always be at 
liberty to do as he pleases. But it is evidently impossible that 
he should enjoy this liberty. He might want to fly, but he 
cannot do it. His liberty is necessarily limited by the condi- 
tions which surround him. 

The first class of limitations are those imposed by the physi- 
cal necessities of the case. Two men cannot exist in the same 
place at the same time. They cannot eat the same loaf of 
bread. Practically a man cannot wholly rid himself of the 
society of his fellows. 

Tet further limitations are imposed by the mutual and equal 



fr' 



tU^ Jj^-^Ji *-*■ 



V. 2.] THE LET-ALONE PRINCIPLE. 445 

rights of men. One man cannot be allowed to assault another, 
however much he might like to do it. The sufferer from a 
contagious disease will be quarantined or isolated by his fellow- 
men. One man is not going to allow his neighbor to erect an 
inflammable house adjoining his own, or to suffer nitro-glyce- 
rine to be stored in his cellar. 

Again, there are certain generally recognized necessities of 
society which lead governments to demand certian duties from 
their citizens. Of these the most important is the payment of 
the taxes necessary to the public support. In most countries 
this includes a contribution to the education of the rising gen- 
eration. In case of war every male citizen may be required 
to bear arms against the enemies of his country. 

The above three limitations upon the let-alone principle have 
little relation to economic questions. The burning question 
of the day, in applying economic principles to governmental 
polic3 r , is whether any economic advantage can be gained by 
government interference with the liberty of the individual. If 
we strictly limit our question in this wa}>-, we shall exclude some 
questions which the economist often discusses. One of these 
is that of limiting the employment of children in factories. 
Legislation to effect this object has been opposed by economists. 
If the purpose of the legislation had been the increase of wealth, 
the ground taken by the economist might have been sound. 
As a matter of fact, however, the purpose was the general good 
of society in the future, which is not a purely economic ques- 
tion, and therefore cannot be treated from a purely economic 
point of view. Owing to the confusion which often arises 
from not keeping in sight the distinction here indicated, we 
shall define it precisely : 

An economic question is one whose issue concerns only 
wealth and its enjoyment, including the power of each individ- 
ual to gain the maximum amount of gratification from his labor. 
When other subjects are involved in the question, it ceases to 
be a purely economic one, and therefore an answer founded 
solely on economic considerations may not be conclusive. 



446 APPLICATIONS OF ECONOMIC SCIENCE. \Y. 3. 

3. We may continue our examination of the principle by 
correcting a misapprehension concerning it. It is very com- 
monly considered as a policy invented by the economists, and 
of doubtful applicability; sometimes, indeed, as a mere ab- 
straction to which it is impossible to give a definite shape. 

On the contrary, the maxim merely expresses a fundamental 
law on which civilized society is organized, and one which, un- 
der certain limitations to be hereafter considered, is obeyed in 
most of the internal relations of all civilized communities. In 
practice every civilized community allows each of its members 
to engage in any occupation he chooses, and to make any bar- 
gains with his fellow-men which he deems just, so long as he 
does not interfere with their equal rights. It is on this basis 
of individual freedom that the whole fabric of modern society 
is erected. All that the economists did was to state and point 
out the principle, and to claim for it a wider range than had 
formerly been allowed it. 

The most common argument against this view is this: In 
early and primitive forms of society, when population is sparse, 
governments weak, and each man under the necessity of pro- 
tecting himself, the principle may well apply. But as civiliza- 
tion develops, and population becomes denser, the relations of 
the individual to society become so intimate that he has to give 
up more and more of his natural rights, until he has so few 
left that it is not worth while to consider them. 

This argument is founded on a complete misapprehension of 
the facts of the case. The let-alone principle, as a principle, is 
quite modern ; and as a policy it is almost entirely a growth of 
modern times. Until within two centuries there was no wide- 
spread idea of the individual having any rights simply as a hu- 
man being. He was born a citizen of some country, or a sub- 
ject of some king, and was allowed such rights at home as law 
or custom sanctioned. But if he left his country, it was only as 
civilization advanced that any rights at all were conceded him. 

One illustration will make this plain. To-day a person with 
money enough to pay his way can travel around the world, 



V. 4.] TEE LET-ALONE PRINCIPLE. 447 

coming into contact with thousands of men without meeting 
any one to challenge him, or to demand whence he comes, 
whither he goes, or why he is not attending to his affairs at 
home. Two or three thousand years ago he could not have 
travelled through Europe without being threatened at every 
step with robbery, imprisonment, slavery, or death. 

The fact is that although, with the progress of society, gov- 
ernment has within its sphere grown more powerful and effi- 
cient, this sphere has not been greatly enlarged. But the 
sphere of individual activity has greatly enlarged, and with 
the spread of knowledge the individual has become better able 
to maintain his rights against society, and governments are be- 
coming less and less able to manage him. Let us look, for ex- 
ample, at such great public works of antiquity as the pyramids 
of Egypt, and think how large a proportion of the laboring 
energies of the nation which erected these structures could be 
commanded by its ruler. We shall then see that although 
civilized governments of the present day could undertake works 
equally great, they could not command the same proportion 
of the labor-power of the people. The labor-power of the na- 
tion has increased many-fold, but the proportion of that power 
which government can command has diminished in a nearly 
equal degree. 

4. The Grounds of the Let-alone Maxim. These grounds 
are briefly as follows : 

I. The Ground of Right. In the conscience of every civil- 
ized man there is a feeling that he has the exclusive right to 
the use of his own faculties, and that society at large, that is, 
his fellow-men, should not interfere with his actions so long as 
he does not interfere with theirs. The recognition of this 
right in each individual carries with it the right of any two or 
more individuals to make such bargains as they may deem best 
for their interests. For example, if a farmer deems it to 
his advantage to borrow money from a capitalist at twelve 
per cent interest, and government comes in with a law that 



448 APPLICATIONS OF ECONOMIC SCIENCE. [V,4. 

no one shall loan money at a higher rate than six per cent, thus 
compelling the farmer to go without the money, and the cap- 
italist to seek some less profitable investment, this is an inter- 
ference with the natural rights of both parties to make their 
own bargains. 

It may be objected to this claim of right that after all it 
amounts to nothing, because it is of no practical use for one to 
claim a right which he cannot persuade or force others to re- 
spect. The reply to this is that we may call it a power as well 
as a right. As a matter of fact the civilized man can and does 
enforce the right we have described in nearly all the every-day 
relations of life. As a general rule the adult man can and does 
use his faculties as he pleases, so long as he refrains from inter- 
ference with the rights of other men to use their faculties as they 
please. The only cases in question are therefore exceptional 
ones, and the maxim then amounts to the assertion that gov- 
ernment, or society at large, if we choose so to consider it, has 
no right to exercise and claim a power in cases which are ex- 
ceptional, and where the exercise of the power is merely vexa- 
tious. 

II. As a matter of policy, the let-alone principle is support- 
ed on the ground that the processes of production and distri- 
bution are conducted in the most advantageous manner when 
left to the management of individuals, each of whom seeks only 
his own interest. If a railway is to be built, self-interest will 
prompt its projectors to make it connect those points and follow 
that line where it is most wanted, because there people will 
pay highest for its use. If the public want an article, that fact 
will stimulate its manufacture. If the makers charge too much 
for it, other makers will compete and thus lower the price. 
The prices of any class of goods are highest where the goods 
are most wanted, and lowest where they are least wanted. Thus 
the self-interest which prompts traders to buy in the cheapest 
and sell in the dearest market prompts them to do what is best 
to satisfy the wants of the public. If an enterprise does not 
pay its projectors, that fact shows that it does not confer upon 



V. 5.] THE LET-ALONE PRINCIPLE. 449 

the public a benefit sufficient to compensate for the capital and 
labor bestowed upon it. In general, since no man is required 
to do anything which is not to his advantage, no bargains will 
be made except such as, in the judgment of the parties, will 
benefit both. 

5. Criticism and Defence of the Let-alone Policy. If we 
consider the preceding argument as valid in its widest and 
most unrestricted application, we shall see that it rests upon 
two tacit assumptions, namely : 

1. That tilings are to be considered good in proportion to 
the desire of people to have them. In other words, govern- 
ment need have no other standard to decide whether an end 
is good for society than the willingness of men to labor for 
the attainment of that end. 

2. That individuals are the best judges of what is for their 
own interests. 

Examination shows that there are, or may be, many excep- 
tions to each of these premises. 

I. Great numbers of people desire, and are willing to pay 
for, things which are injurious both to themselves and their 
posterity ; quack medicines and intoxicating liquors, for exam- 
ple. In such cases it cannot be concluded by any single prin- 
ciple that government should not interfere with the liberty of 
the individual. As another example, children may, with pe- 
cuniary advantage to their parents, be employed in a way 
which will injure their health and cripple their mental and 
physical development. It is clear that we have here a good 
case for governmental interference. 

To consider the subject in a general way, it is a universally 
accepted principle that the main duty of government is to re- 
strain individuals from infringing upon the rights and liberties 
of their fellow-men. We may extend this principle by say- 
ing that it may also be the duty of government to restrain the 
individual from acts injurious to the morals of his fellows or 

to the general good of posterity. 
29 



450 APPLICATIONS OF ECONOMIC SCIENCE. [V. 6. 

II. It is not true that the individual always knows what is 
best for his own interests. This is markedly the case with the 
laboring classes, whose opportunities for learning what places 
offer them the best means of living are very restricted, and 
whose intellectual inability to judge what public action will 
promote their happiness leads them to form combinations in- 
jurious to themselves. They are liable to be led into making 
disadvantageous contracts with employers who are able to 
overreach them. Hence several of the best governments, in- 
cluding that of England, pass laws restricting the freedom of 
contract between various classes of laborers and their em- 
ployers. 

6. Limitations on the Preceding Criticisms. The preceding 
criticisms show that the let-alone principle cannot be regarded 
as a necessary and universal truth, like a theorem of geometry. 
But they are insufficient to prove the principle entirely in- 
valid. Consider first the case in which the government is 
asked to restrain the individual from doing what would be 
harmful to himself or his family. To establish a case for 
remedial legislation, it is not sufficient to show merely that in- 
dividuals use their liberty to their own injury. Two other 
propositions must also be established : 

Firstly. That the individual can be really restrained, or the 
evil he does himself be prevented, by the action of law. 

Secondly. That in executing the proposed law other evils 
equally great will not follow. 

For example, in considering legislation to prevent the evil 
of drunkenness, we must first ascertain whether such laws 
really do prevent the drunkard from getting liquor, or, failing 
in this, whether they save young men from being led into 
temptation. Then we must consider the rights of those who 
have legitimate uses for alcoholic liquors, and compare the 
wrong done them by prohibitory laws with the benefit done 
society by preventing drunkenness. 

In answer to the second criticism, the question is not 



V. 7.] TEE LET-ALONE PRINCIPLE. 451 

whether each person is a perfect judge of what is best for his 
own interests, but whether Congress, or society at large, acting 
in any way, is, practically, a better judge than he is. Now, 
leaving out exceptional cases, whatever we may say of the im- 
perfect judgment of the individual, it is certain that no legis- 
lative power is a better judge of what is for his good than he 
is himself. No public body can so well judge whether an en- 
terprise will pay as the men who are to succeed or fail with it. 
There is a reason stronger than any yet given why men are 
better judges of their practical affairs than legislative bodies 
can be, which we have already hinted at in treating of scientific 
method. It is an observed fact that when a man of good un- 
derstanding and fair business capacity enters npon any opera- 
tions or projects in which his own personal interests are 
involved, he maintains throughout a clear conception of what 
those interests are, and of the effect upon them of each cause 
which may come into play. It is equally an observed fact 
that when such a man studies the public interests, this 
power of seeing the effect of each cause upon those inter- 
ests fails him. The reason of the failure is not so much a 
mistake in estimating the effect of the cause as the want of a 
clear idea what the public interests really are. The inter- 
ests of fifty millions of people form an aggregate so com- 
plex that they cannot be grasped by the mind without a con- 
siderable power of abstraction ; that is, the power of drop- 
ping out of consideration all non-essential conditions of the 
problem, while keeping a firm grasp on all that is essential. 
Now, this power is not universally possessed by men, and is 
much rarer among men of action, who control public affairs, 
than it is among scholars. 

7. Limits of Application of the Let-alone Principle. — The 
Keep-out Policy. This world in which we are placed is not, so 
far as we have discovered, constructed upon a system so simple 
that we can frame any universal laws for the conduct of man- 
kind. We must therefore expect to find limits to the applica- 



452 APPLICATIONS OF ECONOMIC SCIENCE. [V. 7. 

tion of all principles. As we have hitherto defined and 
discussed the let-alone principle, it means only that govern- 
ments ought not to interfere with the freedom of each 
individual to employ his own faculties in his own way, and to 
en^ao-e in such enterprises as he may choose, so long as he 
does not interfere with the equal rights of others. It does not 
deny to governments the same right as the individual to enter 
into business enterprises, subject to the same restrictions as 
individuals. But it is often extended so as to include the 
doctrine that the functions of society should be absolutely 
confined to the protection of the citizen against wrong, and 
that government should not engage in any business enterprise 
whatever, not even in establishing post-offices and carrying the 
mails. 

It is essential that the student of the subject should clearly 
understand the difference between this proposition and that 
of laissez-faire. The one claims that the government should 
not stop the citizen from acting ; the other that it should not 
act itself. For the sake of clearness we shall call the latter 
the Jceep-out principle, because it requires that government 
should keep out of certain fields of action. 

Illustrations. When government undertakes to carry let- 
ters,' it violates the keep-out principle. But it does not violate 
the let-alone principle so long as the business pays for itself 
and no additional tax is necessary to carry it on. When the 
law prohibits any one else from carrying letters, then it vio- 
lates the let-alone principle. 

When a government issues notes to circulate as money, it 
violates the keep-out principle. When it requires that creditors 
shall accept these notes as if they were gold and silver, it violates 
the let-alone principle. 

The establishment and support of public schools is a violation 
of the keep-out principle. It is also a violation of the other 
principle to this extent : that the money to support the schools 
must be raised by taxing every individual, whethei he wants 
the school or not. 



V. 8.] TEE LET-ALONE PRINCIPLE. 453 

Although in the abstract all taxes are a violation of the let- 
alone principle, yet, if we are to adhere to this principle as 
closely as we can, taxation should be levied only for the needs 
of government. Hence when taxes are levied merely to keep 
people from buying particular things, or to favor one person at 
the expense of another, the principle is still further violated. 

The same principle is violated when the law refuses to en- 
force any contracts into which individuals have freely entered 
for their own mutual benefit, and which works no injury to 
third parties. The case is the same when the law construes 
contracts differently from what the parties intended ; for ex- 
ample, when it admits that a debt which the parties agreed 
should be paid in gold may be discharged by a payment in 
silver or paper. But it is no violation to define beforehand 
what shall be considered a dollar, to say that it shall mean a 
certain coin or a certain piece of paper, provided always that 
the definition is applied only to cases in which the parties 
understood that this was to be the meaning. 

It is no violation of the let-alone principle for government 
to compete with individuals in any branch of trade or industry, 
so long as it does so without loss to itself, and hence without 
increase of taxation. But any such action is of course a direct 
violation of the keep-out principle. 

8. Relative Applications of the two Principles. The let- 
alone principle is valuable as an expression of that line of 
policy which has made modern society what it is. But the 
keep-out principle does not rest on any such basis. We can- 
not decide a priori what governments should or should not do. 
We should rather say that government should undertake any 
business which it can undertake with advantage to the public 
and without doing injustice to individuals. It has been more 
than once questioned whether the post-office department should 
open the mails to anything but such mediums of information 
as letters and newspapers. Some maintain that it is no part 
of the business of that department to act as a general carrier, 



454 "APPLICATIONS OF ECONOMIC SCIENCE. [V. 8. 

and that such service should be left to express companies. 
They would exclude little parcels of every kind from the 
mails on this abstract ground alone, without even inquiring 
whether the service could be performed with advantage both 
to the government and the public. Thus a great convenience 
to people living in remote regions would have been denied 
them on a mere abstraction. The correct ground to be taken 
was this : Government has undertaken to send conveyances with 
letters and papers to every part of the country, itself assuming 
the risk of its paying. If the additional cost of carrying mis- 
cellaneous parcels in the same conveyances is compensated by 
the additional revenues thus derived, then the work ought to 
be undertaken ; but not in the opposite case. 

A comprehensive view of the situation will show that there 
are some services which are not performed in the best manner 
when left entirely to private enterprise, because some of the 
conditions which insure good performance are wanting. This 
is notably the case with bank-notes, railways, and telegraphs. 

Banhnotes. We have described the evils suffered by leav- 
ing banks free to issue notes at their own pleasure. This state 
of things was remedied only by governmental interference. 
Government first issued notes itself, prescribed conditions on 
which banks should issue notes, and prohibited the issue of any 
others. 

Railways. On the let-alone and keep-out principles a rail- 
way will be built to a place by some company whenever the 
benefit will pay for the outlay. But as a matter of fact the 
benefit done by the road is always greater than the amount it can 
collect for its services, because it cannot charge each separate 
man what it pleases, but must treat all alike. Again, were the 
principles of universal application, then, if the road did not 
serve the public as well and as cheaply as it could, other capi- 
talists would compete with additional roads. This is not always 
the case. The possible projectors of a second road would see 
that freights would be lowered and the lessened profits divided 
between the old and new roads. Hence, although the first road 



V. 9.] THE LET-ALONE PRINCIPLE. 455 

might make inordinate profits, it would not follow that a second 
would pay. If the second is the last built, the two may com- 
bine to keep up freights, and the public will then find itself 
paying profits on two roads where only one is necessary. 

Telegraphs. The history of telegraph companies in this 
country affords an instructive example of how competition 
may be prevented and an artificial monopoly retained through 
an entire generation. The leading company long managed to 
keep the price of messages above the natural limit, by buying 
up or joining hands with every formidable competing com- 
pany. The process has been a most wasteful one, because the 
leader has to use the excess of profits which it derived from 
the public in these purchases, thus making the public pay for 
all these companies. In consequence of the liability to this 
state of things it has become common for governments to take 
the management of railways and telegraphs into their own 
hands. This is especially the case with telegraphs, which are 
managed in. connection with the post-office by all the leading 
governments of Europe, and that with great advantage to the 
public. 

9. The strongest objection which has been urged against 
the Government of the United States undertaking to benefit 
its people in the same way is the supposed lack of wisdom with 
which it will manage any such business. It has become the 
custom for Congress to attend almost exclusively to special 
"interests" in shaping its policy, thus losing sight of the gen- 
eral public welfare. That is, if any legislation is proposed on 
such a subject as the tariff, the encouragement of industries, 
or the management of the telegraph, Congress does not inves- 
tigate the subject itself with general reference to the public 
welfare, but invites all who are interested to present their 
views. Its policy is then determined by the views thus ob- 
tained. 

This method is a very bad one, because the only views that 
can be presented are those of a few interested parties, and the 




456 APPLICATIONS OF ECONOMIC SCIENCE. 

more these parties can gain at the expense of the public the 
better they can afford to urge such a course as shall be to their 
advantage. 

ILLUSTRATIONS. 

The reader who has carefully weighed the preceding discussion will per- 
ceive that the main objections to government regulating the activity of the 
individual are founded on purely practical considerations and not on abstract 
principles. The reason why wise men are opposed to such regulations is that 
under present conditions it is scarcely possible to have them wisely directed 
to the public good, but very easy to have them employed for the public 
injury. An illustration of each of these possibilities will be pertinent. 

1. If a wise and intelligent man were called upon to devise a single 
measure of government interference which should be of the greatest bene- 
fit to the public health and happiness, and which would be at the same time 
simple and easy, he would probably decide upon the suppression of all 
quack medicines. The public spend many million dollars annually in pro- 
prietary pills, bitters, cordials, oils, and other nostrums. Of many of 
these compositions, spirituous liquors of the worst kind are the principal 
ingredients. They injure the public health and foster the taste for alcohol, 
opium, and other injurious products. What is yet more to the point, it 
cannot be claimed for them, as it can for alcoholic and vinous drinks, that 
they are sometimes of use and that they gratify an appetite. It cannot be 
said that quack medicines are useful in any definable case, and their sole 
basis is a fraudulent pretense that they can cure disease. Yet no one has 
ever proposed their suppression by law, and we may feel fairly confident 
that they are one of the last things which a government charged with the 
task of regulating the activity of the citizen would think of interfering with. 

2. Now take a case of the opposite kind. A few years ago it was dis- 
covered that a fatty product known as oleomargarine could be manufactured 
on a large scale at a small cost, and could be used as a substitute for butter. 
No evidence has ever been adduced that it is not as wholesome and nutri- 
tious as butter. So far as chemical research has shown, it is the equivalent 
of butter in all its relations to the human system. Had any State legislature 
consulted the best chemists within reach, they would have learned that the 
manufacture of this product was as legitimate as that of another. Yet so 
strong is the popular prejudice against it, that laws have been enacted the 
effect of which is to discourage the manufacture; and we can hardly doubt 
that were our legislators clothed by public opinion with the right to direct 
the activities of the individual, one of their first acts would be the suppres- 
sion of this perfectly harmless manufacture. Indeed an attempt to do this 
was actually made by the legislature of New York, and was frustrated only 
by a judicial decision that the law was unconstitutional. 



ILL U8TRA TIONS. 457 

We may conclude from this review that if legislators really represented 
the wisdom of the nation on every subject, they might be given much more 
power over the individual. But so far as we have yet advanced, if we leave 
out the cases in which the good and evil are so patent to everybody that 
none can be deceived, we may foresee that the only effect of such power 
would be to block the wheels of progress, and to make provisions for bene- 
fiting the powerful few whose views could be heard by the legislature at 
the expense of the masses whose interests cannot be felt. 

3. To illustrate the difficulty described in § 9, let us suppose a company 
to find that if Congress can be induced to adopt a certain policy, which we 
shall call policy A, it can collect an extra profit of one cent per annum out 
of each inhabitant of the country. Not one person out of a thousand 
would give a moment's attention to the wrong, or indeed ever find it out. 
Even if he found it out, it would not pay him to protest against the policy 
merely to save himself from a loss of one cent a year for each member of 
his family. He could not send a letter, or print a handbill, or call a 
meeting of his neighbors without spending more time than the question 
was worth. 

Very different would it be with the other side. One cent per year out 
of each inhabitant would make an annual income of $500,000. By expend- 
ing a fraction of this profit the proposers of policy A could make the 
country resound with appeals in their favor. At an annual expense of 
$20,000 two or three new books could be published every year showing 
the necessity or advantage of policy A, and a copy of each book could be 
sent to every member of Congress. Another expenditure of the same 
amount would suffice for the payment of several lecturers on the subject, and 
the call of many enthusiastic public meetings to send petitions to Congress. 
A third instalment would provide a body of able lawyers to plead with 
individual members of Congress. A fourth would secure a long series of 
editorial articles, in various newspapers, all favoring policy A, and calling 
upon the people not to vote for any man who opposed it. Thus year after 
year every man in public life would hear what would seem to be the unani- 
mous voice of public opinion on the side opposed to the public interests. 

4. Has the practice of the let-alone policy any appreciable influence 
upon the development of men? That is to say, let there be two countries, 
similarly situated in all respects, in one of which the government looks 
carefully after the citizen, prescribing his going out and coming in, and 
preventing his engaging in any enterprise which the government does not 
consider beneficial; while in the other the government lets him have his 
own way and suffer the consequences of any unwise acts he may perform. 
"What difference in the character of the men would you expect to arise in 
the course of generations? Is there anything in the policy of England and 
America and the character of the Anglo-Saxon race by which you can 
illustrate your conclusions? 



458 APPLICATIONS OF ECONOMIC SCIENCE. 

5. Herbert Spencer, in Lis Social Statics, claims that if the coining of 
money and the carrying of the mails had been left entirely in private 
hands, the work would have been done as much to the public satisfaction 
as it now is, if not more so. Discuss the subject from the point of view 
of American experience with railways, express companies, and telegraph 
companies. 

6. Mr. Henry C. Carey regarded it an objection to the practice of trade 
that traders always bought goods where they were cheapest and sold them 
where they were dearest. Discuss the advantage of this system from a 
philanthropic point of view. What would be the effect upon the pros- 
perity of the world if traders should adopt a different policy? 

7. When men are left to themselves they always purchase goods where 
they can get them the cheapest. By so doing do they command the goods 
with the minimum of labor to themselves? Can you imagine a state of 
things such that a man should buy cloth from some other than the cheap- 
est seller and yet that the cloth should cost him less labor by his adopting 
that course? If so, state whether these circumstances are such as can 
ordinarily exist in society. 

8. Is the question of a prohibitory liquor-law an economic one? How 
is it with the question of a protective tariff? Of laws against demoralizing 
publications? If, in considering the question proposed in 4, you should 
conclude that individual liberty favored a vigorous development, would 
you set any limits to the proposition? For example, do you consider that 
the liberty on the part of publishers to issue dime-novels for boys to read 
is of a kind which favors development? 



V. 10.] TEE POLICY OF A PROTECTIVE TARIFF. 459 



CHAPTEE II. 

THE POLICY OF A PROTECTIVE TARIFF. 

10. All nations levy taxes to a greater or less extent upon 
goods imported from foreign countries. Such taxes are com- 
monly called customs duties, or simply duties. A scale or 
system of duties is called a tariff. A tariff lias two distinct 
economic objects : 

Firstly. The raising of revenue. 

Secondly. A real or supposed advantage to the country in 
"protecting" its producers against outside competition. 

The policy of levying no tax on imported goods, except for 
revenue, is called free trade. That of levying taxes to "pro- 
mote home industry" is called protection, or the protective 
policy. 

One of the great economic questions of the day is whether a 
protective tariff is, under any circumstances, of real advantage 
to a country, and hence whether the policy of levying it should 
or should not be upheld. This question may be considered 
from two points of view, namely : 

I. That of the let-alone principle in general. 

11. That of the special question of public policy. 

From the point of view of a partisan of the let-alone policy 
as a general principle of action, there is no occasion for pro- 
longed discussion. All taxes levied for the purpose of protec- 
tion interfere with the freedom of the individual to secure his 
goods on the terms most advantageous to himself, and hence 
are violations of the let-alone principle. If, therefore, all men 
admitted this principle, there would be no occasion for discuss- 
ing the policy of protection. Since they do not all admit it, 
we shall not consider it at all, but shall consider the policy of 
protection solely as a practical one touching the public good. 



460 APPLICATIONS OF ECONOMIC SCIENCE. [V. 10. 

Moreover, since it is difficult for one country to frame a policy 
having in view the special benefit of other countries, we shall 
take account only of the interests of the country which levies 
the tariff. The question will then be whether we can really 
promote our own interests by discouraging the importation of 
foreign goods through the instrumentality of a tariff, and not 
whether humanity at large is benefited. This is the question 
on which free-traders and protectionists join issue. 

We have already condemned all universal theories of govern- 
ment the supporters of which would apply them without regard 
to circumstances. Now, if by a protectionist we understand 
one who contends for the highest possible duties on all impor- 
tations, without regard to the requirements or necessities of the 
situation, we must admit that the protectionist takes untenable 
ground. As a matter of fact, all protectionists do not take such 
sweeping ground as this. The general position taken by them, 
and the only one worth considering, is that as a general rule 
we can promote our interests by a protective tariff judiciously 
adapted to our situation. The corresponding position of the 
free-trader is that, as a general rule, our interests are promoted 
by free trade. 

Viewing the subject from this standpoint, we see that if we 
break away from the let-alone principle, we restrict our dis- 
cussion too much in confining it to the consideration of high 
tariffs to protect ourselves against foreign competition. If 
government is going to use its authority over foreign trade for 
the purpose of promoting the interests of its citizens, it ought 
to have full liberty of doing so in the best way, whether by a 
high tariff or a low one. Thus, placing on the free list an arti- 
cle from which we might collect a duty, because we think we 
are thus benefiting manufacturers who use that article in their 
industry, would be a violation of the let-alone principle. For 
we must then levy a higher duty on other articles, and give 
that which is free a special advantage. Again, export as well 
as import duties might promote the public good, and we might 
even go so far as to specially encourage the importation of 



V. 11.] TEE POLICY OF A PROTECTIVE TARIFF. 461 

certain kinds of goods by bounties, in order to discourage 
home manufactures, if by so doing our interests would be pro- 
moted. 

11. Looking at the subject from this broad point of view, 
and throwing off all our prejudices for or against active efforts 
on the part of government to promote our general welfare, it 
must be admitted that many cases may arise in which it would 
seem possible to promote the interests of ourselves and our 
posterity by modifying the natural course of trade. The fol- 
lowing are examples : 

If it is found that the supply of iron, coal, and copper in our 
mines is getting exhausted at a rate that, if continued, would 
result in our posterity being entirely without these materials, 
it would be sound policy to levy a tax upon the extraction of 
those materials and to admit the foreign product free. Al- 
though this would be an algebraically negative tariff, it would 
in the proper sense of the term be protective, if we apply this 
term to any tariff designed to promote our good. 

If any manufacture is injurious to the public health, selfish- 
ness would dictate our adopting such a course as would dis- 
courage its prosecution by our own people. 

If the promotion of some form of industry or labor by a 
protective tariff is proved to be a valuable means of education 
to the people, that fact would afford a sound reason in favor 
of it. 

The policy of permitting the free importation of any product 
the home supply of which is monopolized by one or more par- 
ties capable of combining to keep up the price is too obvious 
to need enforcement. 

But it must never be forgotten that none of these cases can 
be proved by merely vague and general argument, but that 
each must rest on its own grounds. Such general statements 
as, " Home industry may be improved by a protective tariff," 
" The ultimate cost of a product may be diminished by encour- 
aging home competition," are entirely inconclusive and value- 



462 APPLICATIONS OF ECONOMIC SCIENCE. [V. 12. 

less except as set-offs against the corresponding general argu- 
ments in favor of free trade. For example, to show that some 
particular commodity, such as silk, should be protected, it would 
have to be shown not only that things in general might be got 
in a cheaper way by encouraging the home product, but that 
the special product silk would be thus cheapened. 

12. The general argument for free trade is so simple as 
not to require much elaboration. It is in fact nothing more 
than an application to the case of foreign trade of the reasons 
already adduced in favor of the let-alone principle. It is sup- 
posed that, in ordinary cases and as a general rule, industrial 
activity takes the most advantageous form when each individ- 
ual is left free to promote his own interests in his own way, 
subject to the requirement that he shall not encroach upon the 
corresponding freedom of his fellow-man. The money paid 
for goods by the purchaser is a measure of the labor expended 
by the purchaser in earning the monej', and hence in command- 
ing the goods. If they cost less when imported from abroad 
than when bought from his neighbor, that very fact shows 
that, so far as he is concerned, he gets them with less labor to 
himself than if they were made at home. The difference be- 
tween home manufacture and importation is simply this : that 
in the one case we make the goods we want ourselves, and in 
the other case we make other things to give foreigners in ex- 
change for the goods we want. If it is easier and cheaper to 
us to make the things which we give in exchange than to make 
the goods, then it is to our economic advantage to import them 
rather than to make them. 

We have in the beginning mentioned, what is indeed an ob- 
vious fact, that men, when left to themselves, try to supply 
their wants with the least possible amount of labor. The free- 
trader assumes that, in doing this, men are actuated by sound 
common-sense. But the protectionist takes the ground that 
there are other and more intricate questions to be considered 
than the merely economic one of labor. If, in conformity to 



V. 13.] THE POLICY OF A PROTECTIVE TARIFF. 463 

this view of the protectionist, we reject the free-trade argu- 
ment, then we have to consider what reasons can be assigned 
in favor of a protective tariff. The reasons which one meets 
are so numerous that they cannot all be considered in detail ; 
indeed, the course most advantageous to the student will be to 
examine them for himself and reach his own conclusions. "We 
shall therefore do little more than state and analyze the prin- 
cipal reasons in such a way as to guide his thought on the 
subject. 

13. First Argument for Protection: The Home-indus- 
try Argument. The following is the form of the argument as 
usually stated : 

It is important that our commercial and manufacturing in- 
terests should he protected and industry promoted. By levy- 
ing a tariff upon the importation of all products that can he 
made at home we encourage their manufacture at home • by a 
tariff on iron we cause furnaces for the production of iron to 
he built, and men to be employed in working them y levying 
duties on cotton goods causes cotton-mills to he built, and men 
to he employed in making cotton ; a tariff on glass gives rise 
to glass-works, and encourages glass-making • and so on indefi- 
nitely. On the other hand, were free trade permitted, there 
would be an influx of cheap goods from abroad which would 
result in a great diminution in the number of our mills, fur- 
naces, and factories, and would be productive of a great dimi- 
nution in the amount of industry devoted to the manufacture 
and sale of iron, clothing, and other products of industry 
which could be imported from abroad. 

As in all questions of policy, two logical steps come into 
play in this argument — the one of cause and effect, the other 
of policy. It concludes, first, that, as a matter of mere cause 
and effect, the cutting off of the foreign supply of goods pro- 
motes home industry. Secondly, it assumes that industry is a 
good thing and therefore ought to be promoted. It is very 
important that the student should make up his mind on these 



464 APPLICATIONS OF ECONOMIC SCIENCE. [V. 13. 

two conclusions separately and not confound them together. 
The first can be treated by strictly scientific methods in such a 
way that no doubt can exist in the minds of reasonable men. 
The second is one of those questions of policy which every 
person must decide for himself by the aid of his own common- 
sense. 

Beginning witli the first conclusion, it is too obvious to need 
proof that levying duties on goods which, were trade free, 
would be imported must tend not only to increase the home 
manufacture of those particular goods, but the home produc- 
tion of everything necessary to make the goods. This is, in- 
deed, nothing more than saying that when we throw difficulties 
in the way of a man doing something which he wants done, he 
will exert himself to overcome the difficulties, or to reach his 
end by some other means. Cutting off his legs will encourage 
him to make wooden legs ; depriving him of machinery will 
lead him to make more and better use of his hands ; and so on 
indefinitely. The tariff does not make it any easier to manufac- 
ture our own goods. It only makes it more necessary by com- 
pelling us either to manufacture them or to go without them. 

But it would be a mistake to suppose that this increase in 
any particular production necessarily indicates an equal in- 
crease in the sum total of industry. Whatever capital and 
labor are thus devoted to one form of industry will, to a greater 
or less extent, be withdrawn from other employments. In the 
present case we can see exactly how this withdrawal is effected, 
and how the compensation is established. No foreigners are 
going to bring us their goods, or allow us to buy them, unless 
we give them an equivalent of our productions in exchange. 
Vice versa, we are not going to make goods for them unless 
we can get theirs in return. No matter how free trade may 
be between us and the Esquimaux, we will not ship them any 
goods. "We cannot under any circumstances import foreign 
goods without exporting an equivalent of our own products. 
Hence whenever we diminish importations by a protective 
tariff, we must at the same time diminish the production of 



V. 13.] THE POLICY OF A PROTECTIVE TARIFF. 465 

those goods which, were trade free, we should give in exchange 
for the goods imported. Thus the compensation is effected by 
withdrawing labor and capital from the manufacture of goods 
for export, and devoting it to the production of goods for home 
use. 

It would, however, be a mistake in the other direction to say 
that all the industry set in operation by the tariff is withdrawn 
from other employments, and that there is no increase what- 
ever. The very fact that, under free trade, goods are im- 
ported instead of being made at home shows that we find it 
easier to make the goods which we send abroad than to make 
those which we receive in exchange for them. Hence when 
Ave are forced to make them ourselves, there must be an in- 
crease in the sum total of our industry. Thus the first conclu- 
sion of the protectionist is shown to be true to a limited extent. 

We have now to consider the second principle, which is that 
increase of industry is, in itself, a good thing. This principle 
is really at the basis of the argument, because if industry is not 
a good thing in itself, why should we take so much trouble to 
promote it ? 

Few social subjects are of more interest to the philosophical 
student than the views and practices of men on this point. ~No 
opinion is deeper-seated in the ordinary mind than that other 
people should be encouraged to labor, and that when they are 
hard at work the interests of society are promoted. This 
opinion gathers tenfold strength when the work is of a kind 
which strikes the senses. It is hardly possible for any person 
to visit a great foundry, listen to the clank of the machinery, 
see the flames light up the evening sky, and watch the forms 
of a hundred workmen in active motion, without being im- 
pressed with the belief that he sees before him an activity of 
great national importance. If he were asked how the labor of 
five hundred washerwomen in the country compared in impor- 
tance with that of the foundry employing a hundred men and 
making a noise which could be heard miles away, it would strike 
him as very odd that the work of five quiet women should be 
30 



466 APPLICATIONS OF ECONOMIC SCIENCE. [V. 14. 

compared with that of one man working a great steam- 
hammer. It is perfectly certain that the washerwomen do not 
receive as much attention at the hands of the public as the 
iron-founders. "Whether the importance of the two classes to 
public comfort and happiness is proportional to the attention 
they receive is an instructive question for the student to think 
over. 

14. On this question of the desirableness of industry in 
itself the free-trader and the protectionist come squarely at 
issue. The former, if he is going to take any tenable ground, 
must take the ground that industry in itself is a positive evil, 
or, to speak more accurately, that an increased necessity of em- 
ploying it in any particular direction is a drawback to human 
enjoyment. The protectionist, if he is logical, and if he ac- 
cepts his own argument, must join issue and claim that indus- 
try in itself is a good. To decide the point it is necessary to 
make abstraction of everything but the industry, and inquire 
whether industrial activity is a good in itself. For example, 
if a man were to do work in a foundry, and all the hammering, 
melting, burning, and labor went on without any iron being 
produced, or if these processes were all performed over and over 
again on the same iron, we should still have all the industry. 
"Whatever benefits and advantages would then inhere in the 
foundry must be considered as so much in favor of pure in- 
dustry. The men would have the benefit of the exercise, and 
the managers would gain experience in organization. 

In this particular comparison the iron produced must be left 
out of consideration, because we get that under either system. 
The claim of the protectionist is, not that we should get no iron 
under free trade, for we would get rather more than we would 
make, but that we should get it without any hammering, burn- 
ing, digging, or other forms of labor. The question whether 
it is better to get it with or without these operations must de- 
pend on whether the operations are in themselves a good. If 
iron plus industry is better than iron without industry, it can 



V. 15.] TEE POLICY OF A PROTECTIVE TARIFF. 467 

only be because industry without iron is a good thing. This 
-ig" r aTp6Tnt on which the student must make up his mind for 
himself. 

15. Second Argument for Protection. Our labor cannot 
compete with the low-priced labor of Europe without the wages 
of our operatives being depressed to nearly the scale tohich 
prevails abroad. Since there cannot be two prices for the same 
commodity where free competition is allowed, the rate of 
wages in countries between which trade is free cannot differ, by 
more than the cost of exchange and transportation. We may 
therefore lay it down as a general law that whenever free trade 
is permitted between two countries in which the scale of wages 
is decidedly different, the resulting competition will tend to the 
disadvantage of laborers in the country where the wages are 
the highest. 

At first sight this argument might seem identical with the 
former one. The difference is this: in the first argument we 
are concerned only witli industry and not with the rate of 
wages. Wages are different from industry in the abstract. 
Very low wages might promote industry by compelling men to 
labor more in order to make a living. 

One fallacy of this argument lies in its not taking account of 
the very different circumstances of different countries. To 
those who will not accept any proofs except of fact, the fact 
that in England, which is the typical free-trade country of the 
world, wages have long been much higher than in the neigh- 
boring countries of Europe where protective tariffs are in vogue, 
ought to be a sufficient proof. But the use of this particular 
method of proof is quite beneath the economist, for the simple 
reason that it proves nothing except that free competition does 
not necessarily depress wages in the country where they are 
highest. There may be great numbers of causes for this dif- 
ference besides free trade, so that we are not justified in attribut- 
ing it to the latter. The only satisfactory proof of the fallacy 
is shown by the reason of the thing. We have shown in Book 



468 APPLICATIONS OF ECONOMIC SCIENCE. [V. 15. 

TV., Chapter YIIL, that no cheapening of products can lessen 
the sum total of the demand for labor in the country, because 
the money saved on any product goes into the market for the 
purchase of labor on some other product. Thus the only effect 
which can be produced by free trade is an increase of wages for 
one class of laborers, with a corresponding diminution for 
another class. Should we introduce free trade, and, in conse- 
quence, should there be an importation of x dollars' worth of 
goods which we had been making for ourselves, there would 
be a falling off of x in the demand for labor to make these 
goods. But there would be an increased demand y for labor 
to make the goods we should have to give in exchange. If y 
were less than x, the people who had been paying x dollars 
would save the difference, and have it to spend for labor of some 
other kind. The two demands y and x — y would exactly 
compensate the loss x. The equilibrium is restored by a 
gradual change in the direction of labor from the prod action of 
x dollars' worth of goods of one kind to x dollars' worth of 
some other kind. Such a change, as we have already shown, 
can nearly always be made faster than any change in the de- 
mand. 

To the cry, "We cannot compete with the pauper labor of 
Europe," the answer is, Why do you want to compete? And 
this brings us to the question, Why are wages higher here than 
in Europe ? The answer is, Because we have a larger and more 
profitable field for labor in developing the resources of our 
country. Erecting houses, building railways, cutting down the 
forests, digging ore from our mines, and raising wheat from our 
prairies afford a more remunerative employment for labor than 
can be obtained in densely populated countries where the rail- 
ways are already built and the fields of wheat are limited. Our 
laborer compares with him of Europe in a small degree as the 
successful lawyer does with the bootblack. The lawyer can- 
not compete with the bootblack in the art of the latter. Does 
he therefore desire the price of blacking boots to be raised lest 
his professional income shall be reduced? Not at all. He 



V. 17.] THE POLICY OF A PROTECTIVE TARIFF. 4.QQ 

simply does not compete, but employs himself more profitably 
in other directions. 

16. To look at the matter from a different point of view, 
let us consider the case of some great glass-factory. Here we 
have a great industry employing, we may suppose, a thousand 
men and a large amount of capital, consisting of buildings, fur- 
naces, and raw materials. Under free trade this factory would 
perhaps never have existed, and if free trade were permited it 
would perhaps have to stop. Now what does all this mean ? 
It means that one thousand men who, had there been no pro- 
tective tariff, would have been at work building railways, erect- 
ing houses, digging in the silver-mines, raising wool, or rearing 
cattle, have been turned from these employments into building 
chimneys and making glass. Instead of making things to give 
foreigners in exchange for glass they are making the glass it- 
self. Now, the question whether this change is advantageous 
depends very largely upon whether we are to assign any spe- 
cial value to the work of making glass rather than to the other 
work which we have described. By fostering the glass in- 
dustry we have diversified employment. But is this diversity 
of any general advantage? Is the country any better off be- 
cause a thousand men spend their lives in inhaling noxious 
fumes from furnaces rather than working in the open air? 
These are questions for every one to consider for himself. 

17. Another consideration which may be adduced is that of 
the possible amount of foreign competition were all restrictions 
removed. Mr. Edward Atkinson* estimates the value of the 
total products of industry in the United States during the year 
1884 at $10,000,000,000. During the same year the total value 
of imported merchandise was $668,000,000, or less than seven 
per cent of our home production. Were the tariff abolished, it 
is hardly possible that our imports could be doubled ; indeed it 

* The Distribution of Products, p. 31. 



470 APPLICATIONS OF ECONOMIC SCIENCE. [V. 18. 

would take a long time to build the ships necessary to bring 
in the double quantity. It is therefore hardly possible that 7 
per cent more of our labor would meet with foreign competi- 
tion. And, if it did, we should have to produce $700,000,000 
more of goods to export in payment. We should also have to 
build railways and rolling-stock to transport the goods to the 
sea-coast, and bring back those received in exchange. Thus, 
altogether, even the small percentage in which the competition 
was felt would be balanced by new demands incident to the 
change. 

18. A Protective Policy Mutual and Reciprocal. To 
completely understand the workings of a protective tariff it is 
necessary to see that it is reciprocal in its action; that is to say, 
if a country A wishes to protect its industries against the com- 
petition of a country B, that protection can be secured by the 
action of B as well as by that of A itself. The reason of this 
is that trade is mutual, and will not go on unless each country 
receives an equivalent for what it exports. A stream of values 
is constantly flowing in each direction, and the two streams 
being equal, an obstruction produces the same effect whether 
at one point of the stream or another. One example of this is 
seen in the effect of an export duty. 

Suppose that the English nation should require all cotton 
goods exported to America to pay a tax of 50 per cent, while 
no duty was levied by America. It would make no difference 
either to the exporter of the cotton from Liverpool or its im- 
porter in New York whether this tax was paid on sailing from 
Liverpool or on arriving in New York. Hence the price in 
New York would be affected in the same way, and the stimulus 
to our own industry would be the same as if the duty of 50 per 
cent had been levied by America. The only difference would 
be that it would be the British Government and not our own 
which would collect the revenue. But this would make no 
difference to the cotton-manufacturers of our country. 

Again, suppose that all foreign countries should unite in lay- 



V. 18.] THE POLIGT OF A PROTECTIVE TARIFF. 471 

ing a heavy duty upon our wheat, cotton, and other exports ; 
this would diminish all our exports, and would therefore dis- 
courage the production of wheat and cotton in our own country. 
It would also prevent our importing so many manufactured 
goods from abroad, and would thus in two ways cause our in- 
dustry to forsake the production of wheat and cotton and to 
engage in the manufacture of those things which, had foreign 
countries not levied the tariff, would have been imported from 
abroad. Thus the general effect in stimulating and diversifying 
industry would be the same whether we or foreigners levied the 
tariff (cf. III. 70). 

Still there would be important differences in detail, depend- 
ing upon the magnitude of the tariff : if it were not sufficient 
to stop all trade, then foreign governments would get the 
benefit of the revenue and we would get none. Moreover, 
such a foreign tariff on our exports would not encourage any 
special industry among us, but only industries in general. That 
is to say, we could not say that it would encourage the iron in- 
dustry or the cotton industry separately, but would, so to 
speak, encourage equally the production of everything which, 
under free trade, we would import from abroad. On the other 
hand, a domestic tariff can be so adjusted as to protect any par- 
ticular industry, the silk-manufacture for example, and to leave 
any or all others unprotected. Our own tendency is, however, 
to protect all our manufactures equally ; and this can be effected 
by the foreigners levying their tariff on our goods as well as by 
we levying our own tariff on theirs. Moreover, the effects of 
the two tariffs become identical as they approach the prohibitory 
limit. If all foreign governments should levy such tariffs as 
to actually prevent the export of American products, all trade 
in both directions would be stopped, and the effects would be 
the same as if we should levy a prohibitory tariff upon all for- 
eign products whatever. 



472 APPLICATIONS OF ECONOMIC SCIENCE. 



ILLUSTBATIONS AND EXERCISES. 

1. Bastiat, a popular French economist, published a burlesque on the 
arguments for protection by preparing an imaginary petition addressed to 
the Chamber of Deputies by the manufacturers of everything necessary 
to the production of light. This petition showed the great benefit which 
would arise to French industry if a law were enacted requiring that the sun- 
light should be rigorously excluded from all dwellings. The supposed 
petitioners traced out the effects of this policy upon industry in some 
such form as the following: 

I. There would arise a greatly increased demand for all products of in- 
dustry necessary to the production of light, including tallow, oil, lamps, 
and chandeliers. As a result of this demand the industry of all persons 
engaged in the production of these commodities would be stimulated to 
activity, and the prevailing depression and distress among them would be 
immediately cured. 

II. This activity would be transmitted to other industries. The demand 
for tallow would cause an increased demand for oxen and sheep. Thus 
more of these animals would be reared, and we should have a great increase 
in the production of artificial meadows, of wool and of hides, so that the 
whole farming population, including both land-owners and laborers, would 
find an increased demand for the products of their industry. 

III. The increased demand for oil would result in an expansion of the 
whale-fisheries; more ships would be demanded, and thus employment 
would be given to more ship-builders. The latter, in their turn, would be 
able to buy more food and clothing. 

IV. As a result of the increased demand for lamps and chandeliers, all 
workers in brass would be immediately benefited by the increased demand 
for their industry. Their augmented income would enable them also to 
purchase more food and clothing. The increased demand for food and 
clothing would benefit all producers of food and all makers of clothing. 
Thus, step by step, the industry of all classes and of the whole nation would 
be stimulated to renewed activity, and an era of prosperity such as had 
never before been known would bless the whole land. 

Now, what is right and what is wrong in the conclusions of this petition ? 
Were the supposed petitioners right or wrong in claiming that the policy 
which they advocated would result in a greatly increased demand for labor 
and in a great increase in the national industry ? Is it or is it not true that 
the production of tallow, oil, and chandeliers would be stimulated, and that 
the stimulus would extend to laborers of every class ? If they were right, 
what reason can you assign why their petition should not be granted? Sup- 
pose that by a little ingenuity an artificial light could be produced which 
would be as good and as pleasant to the eyes as dajdight: what reason can 



THE POLICY OF A PROTECTIVE TARIFF. 473 

you assign against its employment in lieu of permitting the free introduc- 
tion of daylight ? 

2. Now view the opposite picture of an apparent evil. Suppose a tree 
discovered in foreign parts, resembling the cotton-plant, but suddenly 
brought to such perfection that completely made fashionable garments of 
any cut the planter might desire could be made to grow on the plant; and 
this with such ease and in such quantities that one fourth the laborers now 
engaged in cotton cultivation could produce clothing for the whole country 
at a merely nominal cost. 

Note the consequences. All the tailors of the country would be imme- 
diately thrown out of employment. All the stores of cloth and clothing piled 
up in our warehouses would immediately become almost valueless. The 
value of all our factories would be as completely destroyed as if a devouring 
angel had swept over the land. Capital worth thousands of millions would 
vanish in a night. Nearly all the clothiers in the land would become 
bankrupts, millions of operatives would be thrown out of employment, and 
a commercial crisis such as has never yet been known would supervene. 

Would all this on the whole be an evil or a benefit ? From the stand- 
point of common-sense could it be an evil that everybody should be well 
clothed without labor and without price ? How would the compensation be 
effected, and what would be the ultimate effect of the new clothes-bearing 
plant upon the interests of the country ? As a matter of policy ought 
Congress to prohibit the introduction and cultivation of such a tree? 

3. Consider the following argument and counter-argument for protec- 
tion: 

Argument. The principal effect of the protective tariff is to benefit the 
farmer by securing for him a home market for the products of his farm. 
The policy in question leads to the establishment of manufactories in his 
immediate neighborhood, thus bringing the consumer of wheat to his own 
door as it were. The cost of transporting wheat to a foreign country, and 
of bringing back the products of that country to the farmer for his own use, 
is thus saved. The manufacturer and his workman, in consequence of the 
stimulus to their industry given by the tariff, are better able to purchase the 
farmer's wheat, while the farmer himself has fewer competitors to engage 
in the work of raising wheat. Thus the agricultural class is that most 
benefited. 

Counter-argument. No home market can be created by the tariff for the 
simple reason that the demand for food depends principally upon the num- 
ber of people to be fed and the population within reach of the farmers. 
The demand for food is not increased by the tariff; all classes of laborers 
can purchase all the food needed for their subsistence at lower rates of 
wages than they now receive. They will not purchase more than this un- 
der any circumstances. Hence, so far as mere selling is concerned, the 
farmer has the same market in either case. But under free trade he can 



474 APPLICATIONS OF ECONOMIC SCIENCE. 

purchase everything he wants at a cheaper rate than he can if his foreign 
sources of supply are cut off by the tariff. 

From the best data you have at hand compare the cost of transporting a 
cart-load of wheat to a factory ten miles away by horse-power and the cost of 
transporting the same wheat from Chicago to Liverpool by railway and 
steamship. Compare also the cost of sending a pair of boots from one end 
of New York City to the other by a messenger-boy, and the cost of trans- 
porting the same boots across the Atlantic. From these comparisons frame 
a definition of the term "distance from market" in an economic sense. 
Consider also how far it is true that the farmer in Illinois must pay all the 
transportation both ways if he trades with a foreign country, and how far 
it would be true to say that the foreigner who eats his wheat and returns 
the goods must pay the transportation in both directions. Can we throw 
the cost upon the one more than upon the other? 

4. Why do the English desire free trade with America? Is it that they 
may find a way of getting their own goods consumed by us, or that they 
may get the wheat and corn of our prairies to feed their own people with? 

5. Trace out the points of resemblance and difference between the ar- 
guments for protection and the arguments against labor-saving machinery. 
So far as our own interests are concerned, is there any essential difference 
between the effects of our markets being flooded with cheap goods, produced 
by a foreign pauper working efficiently for almost nothing, and by the pro- 
ducts of a machine working for nothing but the labor of attention? 

6. We feel very mucli pleased when a foreign market is opened for our 
goods, but after they are sold we esteem it a favor if we freely admit the 
goods the foreigners give in exchange. When we find, by statistically 
summing up our exports and imports, that we have sent abroad goods of 
far greater value than we have received in exchange, we say that the bal- 
ance of trade is in our favor. Is this way of looking at the matter in 
accordance with logic and common-sense? If so, just how far would you 
carry the principle? If it should be found that we had exported goods to 
the amount of one hundred million dollars and only received ten millions' 
worth from abroad, would this show a desirable state of things? Is it any 
use to open up a new market if we get nothing in exchange? Are we 
better off the more we get in exchange or the less we get in exchange? If 
the former, is it logical to try to diminish the amount of imports by protec- 
tive duties? If the latter, what sort of people should we select to bestow our 
goods upon? 

7. At the present time hardly any fine white sugar is made in England; 
the English consumers are supplied almost entirely from France. This is 
because the French Government gives what virtually amounts to a bounty 
on all the sugar which goes from France; thus enabling French sugar-refin- 
ers to undersell their competitors. (Mrs. Fawcett's Political Economy.) 



TEE POLICY OF A PROTECTIVE TARIFF. 475 

Is it to the advantage or disadvantage of the British nation that the 
French give this bounty to their sugar-manufacturers? Which view soever 
you take, carry it out to its logical consequences on the largest scale. Consider 
especially a nation which we may call X surrounded by neighbors who 
are bent on encouraging their own industry to the highest extent at the ex- 
pense of that of X. "Whatever industry X engages in, some surrounding 
nation offers to its own producers in that industry such a premium that 
they can produce and sell the product to the people of X cheaper than 
these people can make it themselves, and thus the manufacturers of X 
are kept at a relative disadvantage. Suppose a combined attempt were made 
by the neighbors to continue this policy to an unlimited extent: would the 
effect upon the people of X be beneficial or injurious? State how far this 
policy could be carried, and what its ultimate outcome would be. 

8. Analyze the following arguments for protection, and show whether 
such a result is probable: 

If free trade were permitted, and if foreign manufacturers found our 
home manufacturers producing anything which the foreigners could pro- 
duce with equal advantage, they would first flood our markets with the 
articles in such quantities us to entirely stop the American production. 
The Americans having disbanded all their laborers engaged in the manu- 
factories and suffered the machinery to go into decay, the foreigners would 
put the price up until it was higher than it ever was before, and would so 
keep it until the American manufacturers again went to work. Then they 
would, by lowering the price, again repeat the process of destruction, and 
so on indefinitely; thus subjecting the price and supply in our country to 
enormous fluctuations, and causing our manufacturers to waste time and 
capital in starting enterprises which were to be immediately rendered 
worthless. 

If we call the home manufacturers A, B, C, etc., and the foreign manu- 
facturers X, Y, Z, etc., then under a prohibitory tariff competition will be 
confined to A, B, C, etc., while under free trade X. Y, Z, etc., will compete 
with each other and with A, B, C, etc., also. Under what circumstances, if 
any, is it possible, by thus widening the range of competition, to make prices 
more unsteady? The result will be different according as the home or for- 
eign product is more or less monopolized. Consider as an extreme case that 
in which there is but one home manufacturer, A, and but one foreign man- 
ufacturer, X, each of whom has a complete manufactory. 

Consider also whether the following reversal of the reasoning is as sound 
as the other: If the foreign manufacturer should try the policy pointed 
out, the result would be that America would supply itself at a very cheap 
rate with a large quantity of the goods, while the American manufacturer, 
though temporarily ceasing his production, would employ his time in get- 
ting ready to re commence at the first favorable moment. His men would 
temporarily find other employments. When the foreigner attempted to 



476 APPLICATIONS OF ECONOMIC SCIENCE. 

raise the prices, be would find no American buyers until tbe stock be bad 
formerly sold was nearly used up. Tben tbe American producer, finding 
tbe market favorable, would start work again, thus compelling tbe for- 
eigner to again lower bis prices. Tbe result would be tbat tbe foreigner 
would be compelled to sell to us below cost and there would be no fluctua- 
tions whatever. 

9. In the New York Tribune Mr. Horace Greeley once illustrated the 
danger of free trade by picturing an imaginary island the inhabitants of 
which supplied all their own wants by their own industry. But the island 
was discovered by a nation of traders, who forthwith sent cargoes of goods 
to it and offered to the inhabitants everything that they wanted at a cheaper 
rate than they could produce it themselves. The result was that all indus- 
try on the island ceased and universal ruin overwhelmed the inhabitants. 

Supposing the inhabitants to be men of sense, were they the happiest or 
the most miserable of beings? 

10. Under the Constitution of the United States no State can levy duties 
upon imports. The result is tbat uo State can protect its industry against 
tbe unrestricted competition of that of other, States, and thus we have a 
more extended system of absolute free trade on the American continent 
than in any other similar region of the world. Consider whether this is to 
the advantage or to the disadvantage of the less developed States. Take 
up the questions involved in the following order: 

I. In the State of Ohio no great factory for the production of fine cotton 
goods has arisen or can arise owing to the superior facilities of New Eng- 
land in that branch of industry. 

11. Is it not, then, to the detriment of the people of Ohio that they cannot 
protect themselves against this competition? If not, why not? Does the 
fact that the competition comes from fellow-countrymen change its effect? 
Can it be a good thing to have tbe manufactures of Ohio crippled by citi- 
zens of Massachusetts, but a bad thing to have the same thing done by for- 
eigners? If so, show in what the good consists in the one case, and in 
what the bad consists in the other case. Suppose the New England States 
to be separated from the Union: would their competition then become 
more injurious to tbe other States than it is now? Suppose the Constitu- 
tion to be so amended tbat each State could protect its industry against the 
competition of other States of the Union: do you think a protectionist party 
would arise in each State demanding such protection? Could they or could 
they not logically apply the arguments for protection to the case? 

In fine, if a free-trader should argue thus: 

That which is an evil when inflicted by one agency cannot become a 
good merely by being inflicted by some other agency. If, then, it is an evil 
that the cotton-manufacture of Ohio should be kept down by foreign com- 
petition, it must also be an evil to allow its suppression by Massachusetts 



THE POLICY OF A PROTECTIVE TARIFF. 477 

competition, and the constitutional inhibition in question is injurious to 
those new States which would build up their manufactures; — 
How would you answer him? 

11. Can a protective tariff be effective if it does not raise the price of the 
article protected? That is, if the price remains the same without the duty 
as with it, will the home manufacture be encouraged? 

12. It is sometimes said that the duty on each commodity should be so 
adjusted as just to enable the home producer to compete on even terms with 
his foreign competitor. What reasons can you assign for or against this 
policy? Consider both its practicability and its application to special cases; 
as when the conditions of home production are very unfavorable. Suppose 
the policy adopted, and apply to its discussion the methods of III. 70, 71. 

13. About the close of our civil war, the importers of a particular kind 
of ore from Sweden petitioned Congress that it might be placed on the free 
list, but asked for a high duty on the metal extracted from it. One reason, 
they assigned was that the ore was very bulky in proportion to the metal 
extracted from it, and that thus employment would be given to American 
ships engaged in importing the ore. "Was this a sound reason, or the con- 
trary? 

14. Tin, not being found in important quantities in this country, is ad- 
mitted free of duty when unmanufactured. If a company should discover 
a tin-mine, we have every reason to believe that they would immediately 
succeed in getting a duty of from 30 to 50 per cent levied upon imported 
tin in order to place them upon the same level with the miners of other 
metals. How would the price of tin then be fixed, and would the discov- 
ery of the mine prove a benefit or an evil to the community at large? 

15. When, in the year 1883, we undertook to build a few iron-clad ships 
of the first class, it was found that there was no rolling or forging machin- 
ery in the country of sufficient power to roll the steel plates, and we had to 
import them from abroad. Looking more closely into the matter, we find 
the following state of things: 

The ores and metals of different countries have different qualities, so 
that to get the best combination for special purposes it is necessary to com- 
bine those from different countries, or to use some kinds for one purpose 
and other kinds for another purpose. 

Now, if an Englishman wants to set up a great rolling-mill and forge, he 
can import all the machinery he finds necessary into England free of duty; 
and after his mill is built he can choose his raw materials of all kinds from 
the whole world without let or hindrance from the collectors of customs. 

If an American wants to erect such an establishment, lie has to pay a 
heavy duty on all the machinery he finds it necessary to import, and after 
his works are built he must pay a similar duty, generally ranging from 20 



478 APPLICATIONS OF ECONOMIC SCIENCE. 

to 50 per cent of the value, upon nearly everything he imports for the 
purpose of being manufactured. Can you trace any relation of cause and 
effect between this policy and the lack of establishments among us which 
can compete with those of England in the manufacture of guns and steel 
plates for war-sbips? 

What is the effect of the policy upon the building of iron ships in 
America? 

16. In March, 1884, a bill was before Congress making a general reduc- 
tion of 20 per cent in the duties upon imports. The following reasons 
against the bill were urged by the minority members of the Committee of 
Ways and Means: 

" The reduction proposed by the bill now under consideration is 20 
per cent, and it is a noteworthy fact that not a single interest in the United 
States has asked for it — neither the manufacturer, the miner, the laborer, 
the farmer, nor the consumer has requested or demanded the proposed re- 
duction. On the contrary, every interest — manufacturing, laboring, and 
agricultural — represented before the Committee of Ways and Means has 
protested most earnestly against the change recommended by a majority of 
the committee. 

" We have said that no interest has asked for it. We should have ex- 
cepted the free-trade clubs of New York and Brooklyn, which were repre- 
sented before the committee by a number of so-called political economists, 
urging not this reduction alone, but entire abolition of import duties which 
in any way discriminate in favor of American producers." 

Should these facts have militated for or against the bill? 

17. "The categories all favor free trade, but the facts are all for pro- 
tection." 

Is this true? Taking the world at large, are the protected or free-trade 
countries most powerful and prosperous? How do laborers in England 
compare with those in Austria, Russia, and other countries where the pro- 
tective policy prevails? 

18. Is it the object and effect of a protective tariff to increase or to di- 
minish the amount of labor, capital, and industry necessary to command a 
given supply of commodities? 



V. 19.] ON TAXATION. 479 



CHAPTER III. 

ON TAXATION. 

19. General Considerations. It is essential to the exist- 
ence of civilized society that a certain amount of the labor 
of the social organism shall be devoted to the performance of 
the functions of government. The persons who perform these 
functions are government officers or employes. They have 
to be paid for their services, and large sums have to be ex- 
pended by the government in the purchase of commodities 
for the public uses. It follows that government must be in 
receipt of an income with which to pay these expenses. This 
income is called revenue. From the very nature of the case it 
cannot be to any great extent gained by production, as individ- 
uals gain their income. It must therefore be obtained by a 
levy upon the people governed. This levy is called taxation, 
and the money collected by it is called a tax. The object of 
the present chapter is to set forth the principal methods of tax- 
ation, and to trace their effects upon the interests of society. 

In discussing this subject it is very common to consider only 
the effect of collecting a tax. But the effect does not termi- 
nate when the citizen has paid his money into the public 
treasury. All money paid in is to be paid out again by the 
government, and the disbursement is as important a factor in 
the result as the collection. 

The reader who has mastered the preceding chapters will see 
that the inflow and outflow of the public revenues are so con- 
nected that one cannot be advantageously considered apart 
from the other. Hence when the economist is ashed what will 
be the effect if government should levy a tax, and thus largely 
increase its revenue, he would have to reply : I cannot tell 
what the effect will be until I know how the increase of revenue 



480 APPLICATIONS OF ECONOMIC SCIENCE. [V. 20. 

is to be expended. It may be expended abroad or at home ; 
in levying war or in constructing a canal ; in paying off a 
national debt, or in subsidies to various forms of industry. The 
difference between the effects of these various modes of ex- 
penditure is much greater than the difference between one 
method and another of levying a tax. 

20. We shall begin by establishing certain principles com- 
mon to all methods of taxation. In doing this we suppose the 
reader to have clearly in mind the nature of the monetary 
and industrial circulations as developed in the preceding book. 
The first principle to be understood is this : 

In whatever way a government may collect a tax, the act of 
collection diminishes the monetary flow from the tax-payers to 
their fellow-citizens by an amount equal to the tax. This re- 
suit is so obvious as not to need extended discussion. Every 
person who pays money to a public collector has so much the 
less to pa}' to his fellow-men for their goods or services, and 
thus his monetary flow is diminished. If the taxpayer makes 
this up by charging a higher price for his goods, then the per- 
sons who buy his goods, having to pay more for them, will 
have less money to spend in other directions. Thus the whole 
amount of taxes collected comes out of the monetary flow of 
the community. The money demand for labor must therefore 
fall off by an equal amount (IV. 37) ; and if there were no 
compensation for this, labor to an amount equal to the tax 
would be thrown out of employment until prices fell so as to 
restore the compensation. This effect has been fully developed 
in Book IY., Chapter VII., and therefore need not be further 
considered. Our conclusion is that if a flow T is collected as a. 
tax, a quantity of labor valued at T will be found waiting for 
the employment of which it has been deprived by its employ- 
ers being taxed. 

But the compensation is effected when government expends 
its revenue. This act produces the same effect as individual 
expenditure. That is to say, all the money expended by the 






V. 21.] ON TAXATION. 481 

government goes directly or indirectly to those who render it 
services. Payments to its officers reach them directly; pay- 
ments for supplies furnished reach the producers of those sup- 
plies through the regular channels of trade. Thus, in the act 
of expenditure the monetary flow is restored and a demand for 
labor is set up equal to the demand lost by the levying of the 
tax. 

But this labor may not be, and probably is not, of the same 
kind as that thrown out of employment by the levying of the 
tax, and there must be a change of employment. "We therefore 
reach the conclusion : The operation of levying and expend- 
ing a tax consists in diverting a certain amount of industry 
from the ordinary channels of husiness into the channels re- 
quired hy the government.* 

But it must not be inferred that such a change of labor 
is continually brought about by taxation. When a govern- 
ment once begins raising and expending its regular annual 
revenue, the change of industry must be made once for all, and 
the industry will continue in its new course so long as the tax 
remains substantially the same. Now all governments from 
time immemorial have been obliged to levy taxes in some way, 
and thus society has grown up to the system of having a por- 
tion of its work devoted to the government service. A real 
change in the effect occurs only when government makes a 
change in the amount of its revenue. If the revenue is dimin- 
ished, the industry in government channels must be diminished, 
and other industry increased. The ordinary operations of tax- 
ation and expenditure do not therefore involve any disturbance 
in the supply of and demand for labor. 

21. In drawing the preceding conclusions we have spoken 
of the government revenue as raised by taxation. A govern- 
ment may also supply its wants by borrowing money to be re* 
paid at a future time. But all that has been said applies equally 



Cf. Book III., Chapter V., and Book IV., Chapter X. 
31 



482 APPLICATIONS OF ECONOMIC SCIENCE. [V. 22. 

to this case. So far as the immediate effects are concerned, they 
are the same whether government raises money by taxation or 
by loans. Every dollar borrowed comes out of the monetaiy 
flow from the person making the loan as completely as if it were 
obtained by taxation. Every person who loans money to the 
government loans that which otherwise he would have had to 
expend in other directions. And when the government ex- 
pends borrowed money, it creates a demand for labor exactly 
the same as when it expends a tax. 

In all this we refer only to the immediate economic effect. 
The ultimate effects are of course different, owing to the re- 
payment of the loan. When a tax is paid, the transaction 
between the payer and the government is completed. But 
when government raises money by a loan, the payer becomes the 
creditor of the government and thus a national debt is created. 
The result is that the government must pay the creditor an 
annual stipend during a period of time which may be stated or 
may remain undefined. This stipend is to be raised by taxa- 
tion, which would not have been necessary but for the loan. 
Thus the ultimate result of borrowing instead of levying is 
that an increased revenue is to be raised in the future. 

22. The effects of the various modes of government ex- 
penditure are determined in the same way as the effects of in- 
dividual expenditure. This may be illustrated by considering 
the principal objects for which government needs a revenue. 

I. That portion of the revenue which government pays to its 
officers and employes for their services returns immediately 
to the circulation, so as to form a part of the. individual income 
of those persons. 

- II. That portion which is expended in the purchase of sup- 
plies is divided amongst the producers of the supplies as 
income, in the way already pointed out (IY. 30). If all the 
producers are citizens of the government, the money is immedi- 
ately restored to the circulation from which it was withdrawn, 
as in the first case. 



V. 23.] ON TAXATION. 483 

III. If the money is employed in paying off a debt held by its 
own citizens, it will soon reach the same general circulation. 
Each creditor will then be in possession of a sum of money 
which he otherwise would not have had. As a general rule he 
will expend the money in increasing his capital, because he has 
been considering the government bonds which he holds as a 
part of his capital. But, however he expends it, it must 
speedily enter into the general circulation, and be expended in 
the employment of labor. 

IY. If the money is expended in public improvements in- 
tended to yield a profit, in canals or railways for example, the 
immediate effect of the expenditure is still the same. But the 
profit to be ultimately derived from the improvement will be 
a source of gain which would not have been enjoyed had the 
expenditure been made for other purposes. 

"V. If the money is spent abroad instead of at home, then 
it is of necessity withdrawn from the home circulation, and 
added to the circulation of the country to which it goes. The 
result will be a tendency to a fall of prices in the one country 
and a rise in the other. This will ultimately bring the money 
back again, and thus in the long-run the balance will be restored. 
Indeed, it is highly probable that the payment will have been 
made in the first place b} 7 exporting goods and not by export- 
ing the money. That is to say, when the government has to 
make the payment abroad, it might purchase foreign exchange 
from its bankers. The home merchants, finding foreign ex- 
change scarce in consequence, will be stimulated to export 
goods in order to keep up the balance. 

23. It follows from all this that the really important ques- 
tion growing out of taxation is, not how the tax is to be levied, 
but how it is to be expended. In whatever way it is levied, it 
will have come out of the pockets of the community, and dif- 
ferent classes will probably have to pay nearly the same in any 
case. But when the tax is expended, the government becomes 
the sole director of the labor which it employs by the expendi- 



484 APPLICATIONS OF ECONOMIC SCIENCE. [V. 24. 

ture. Indeed, what is really expended by the country is, not 
the money paid as tax, but the labor employed with it by the 
government. The money remains, but the labor is used up in 
the performance of some public work. Whether it is ex- 
pended for the public good or not depends entirely on the ob- 
ject to which it is applied. If expended in war, then the labor 
of large bodies of men is turned into the channels of destruc- 
tion instead of those of production, and the result is a loss to 
humanity of the whole labor thus directed. If directed to the 
current administration of justice, an advantage is gained ; but the 
advantage terminates with itself. If devoted to public works 
which really prove profitable, it is expended with a future 
profit ; if to unprofitable works, it is wasted. If devoted to 
the payment of a debt, then on the whole the tendency will be 
to increase the capital of the country, because the bond-holders 
who receive the money will in most cases employ it in increas- 
ing their capital. 

24. Different Kinds of Taxes. Taxes are ordinarily divided 
into direct and indirect. 

A direct tax is one which it is supposed that the payer cannot 
collect again from the rest of the community by charging a 
higher price for his services. 

Indirect taxes are those levied in such a way that the person 
who pays them can get his money back again by charging the 
rest of the community a higher price for goods on which the 
taxes are levied. 

Examples of direct taxes are those on income. An income- 
tax consists of a certain percentage of the total net income of 
the person on whom it is levied. Since the payment of such a 
tax does not increase his power of rendering service to the com- 
munity, he can charge the latter no more after paying the tax 
than he could before. Taxes on the sum total of a man's 
wealth, and upon his houses and lands, are commonly supposed 
to fall into the same category. 

Examples of indirect taxes are those levied upon the manu- 



V. 25.] ON TAXATION. 485 

facture of commodities. In such cases it is supposed that the 
manufacturer can get his tax back again by charging a higher 
price for his goods. Thus it is the consumers of the goods, and 
not the manufacturers, out of whose pockets the tax is sup- 
posed ultimately to come. If every commodity which is used 
by the community is thus taxed, it will be the whole commu- 
nity which will pay, no matter how few the manufacturers. 
The tax is called indirect because it is paid by the consumers, 
not to the government directly, but through the men who sell 
goods at the increased price. 

Economically this classification is imperfect, because it is 
scarcely possible to determine in all cases whether a tax can or 
cannot be transferred by the person paying it charging more for 
his services or commodities. A tax on city real estate, for ex- 
ample, will lead to its owners charging a higher rental, so that it 
might be regarded as indirect. But if the owner of a house 
lives in it, he can scarcely charge to others the tax which he 
pays on his house. Again, a manufacturer may not be able to 
collect his tax from others for the simple reason that he cannot 
sell his goods at all after he raises their prices. He may there- 
fore be obliged to sustain the loss himself, or go out of business. 

25. The Double Classification of Taxes. The fact is that 
the methods and systems of taxation are so varied as not to 
admit of an absolutely exhaustive classification. But the great 
mass of those which are collected in the United States, and per- 
haps in other civilized communities, may divide into three 
classes, as follows : 

I. Taxes levied on individuals. Under this head we in- 
clude all taxes which any individual is required to pay irre- 
spective of his wealth or the amount of his income. The fol- 
lowing are examples : 

A poll-tax is a designated sum of money which every male 
adult of a community is required to pay annually. One dollar 
was the common amount of such a tax. Being levied without 
reference to ability, it was extremely obnoxious and has become 



486 APPLICATIONS OF ECONOMIC SCIENCE. [V. 25. 

nearly obsolete. In the few States where it still exists it natu- 
rally costs more than its value to collect it forcibly from the 
individual. Its payment is therefore generally made, as in 
Virginia, a condition of exercising the right of suffrage. 

Licenses to practise particular trades or professions afford 
another example. In most of our cities, bankers, tradesmen, 
and managers of nearly every kind of business are required to 
pay a certain sum annually for the privilege of exercising their 
avocations. The payments for this license, being fixed without 
regard to the extent of the business, constitute a purely individ- 
ual tax. 

II. Taxes on production. The distinguishing feature of a 
tax on production is that it is a percentage of the value of 
something which the individual produces. For example, an 
excise duty on spirituous liquors is a tax of so much per gallon 
produced. Those who do not produce the articles taxed have 
no tax to pay directly to the government. Customs duties on 
foreign imports belong to the same class, because the fact that 
the production is that of a foreigner does not change the 
application of the general principle. So far as we are con- 
cerned, any person who imports goods stands to us in the relation 
of a producer of the goods. The tax he has to pay is propor- 
tional to the amount of goods he supplies us with. 

Taxes on production are of two kinds, according to whether 
they are levied on specially designated articles, or on the total 
productivity of the individual. Those which we have already 
mentioned as examples are levied upon special products. The 
total productivity of the individual is measured by his income, 
so that a tax on this basis is an income-tax. "When such a tax 
is levied, the individual is required to make known to the gov- 
ernment his total profits and earnings for the year, and to pay 
a designated percentage of them into the treasury. ' 

III. Taxes levied on accumulated wealth. These differ 
from taxes on production in this very important respect: 
that the former are paid once for all, while in the case of the 
latter the same wealth has to pay over and over as long as it is 



V. 25.] 



ON TAXATION. 



487 



kept. When a keg of beer has once paid the excise duty it is 
free ever thereafter. When an income-tax only is levied, an in- 
dividual who gains a surplus income of $1000 year after year 
lias only to pay the same annual tax year after year. But if he 
invests this income in any form of capital, then for every thou- 
sand dollars he invests and keeps he has to pay an annual tribute. 

A tax on accumulation may be levied on the same two 
systems as one on production. That is to say, it may be levied 
only on certain designated kinds of wealth, such as bank- 
stocks, houses, lands, carriages, watches, etc., or it may be 
levied on one's whole possessions without regard to their 
character. 

It follows that there is a double classification of taxes. The 
one classification turns upon the general condition which de- 
termines the amount of the tax, whether the latter is purely 
personal or depends upon production or accumulation. The 
other division depends upon whether the tax is levied on sums 
total or is confined to certain designated objects. 

This double classification will be made more clear by pre- 
senting it in a tabular form. 



Classification. 


Order A. 

Taxes on totals, or 

unlimited taxes. 


Order B. 

Taxes confined to 

designated subjects. 


Class I. 
Taxes on persons. 


A tax on every one of a 
certain age or sex. 
(Poll-tax.) 


Taxes on designated oc- 
cupations. 

(Licenses.) 


Class II. 
Taxes on production. 


Tax on total production 

of every individual. 

(Income-tax.) 


Tax on designated pro- 
ducts only. 
(Customs, excise duties.) 


Class III. 
Taxes on accumulation. 


Taxes on one's whole pos- 
sessions, without regard 
to their character. 


Taxes on designated kinds 
of wealth: watches, jew- 
elry, plate, carriages^ 
etc. 



488 APPLICATIONS OF ECONOMIC SCIENCE. [V. 26. 

26. Results of levying a Tax. Although, as already stated, 
the economic questions involved in the expenditure of a tax are 
more important than those involved in its levy, yet the latter 
are most in need of investigation. There are two reasons for 
this. In the first place, the objects for which revenue is to 
be expended are generally determined by circumstances, and 
not by the arbitrary will of the government or of the citizens. 
There are certain officials to be employed and paid, certain 
supplies to be furnished, certain debts to be liquidated, irre- 
spective of the will of the government for the moment. But 
the method in which the tax shall be levied is altogether a 
matter for the decision of the public. 

In the next place, the very fact that taxes paid into the pub- 
lic treasury come out of the monetary circulation makes the 
public very critical in inquiring into them, and it is necessary 
not only to consider what is theoretically the best kind of a 
tax, but also what method of taxation is least displeasing to the" 
public. Thus the question of the best method of raising a 
government revenue becomes a very delicate one, involving 
not only purely economic considerations, but questions of politi- 
cal expedienc}' - . The success of a system of taxation depends so 
largely upon the condition of the people taxed that no system 
founded solely on a general theory can be relied upon. Still 
we should have some guiding principles to start with. Tour 
such principles were laid down by Adam Smith, of which the 
first was in the following words : 

" The subjects of every state ought to contribute to the sup- 
port of the government, as nearly as possible in proportion to 
their respective abilities; that is, in proportion to the revenue 
which they respectively enjoy under the protection of the 
state." 

The remaining three principles were : (1) that the tax to 
bo paid by each individual should be certain and not arbitrary ; 
(2) that it should be payable at the time and in the way most 
convenient to the payer ; (3) that the cost of collection should 
be as small as possible. 



V. 87.] ON TAXATION. 489 

27. The tax which most directly accords with the first 
maxim is one upon gross income. In fact, since Smith defines 
ability to pay as measured by the revenue which the citizen 
enjoys under the protection of the state, and as this revenue is 
neither more nor less than his inc6me, it follows that an income- 
tax is the very one indicated. Such a tax is levied by deter- 
mining every man's income from all sources year by year, and 
requiring him to pay a certain percentage of it into the public 
treasury. In Great Britain the imposition of such a tax is the 
most common method of meeting an unusual demand upon the 
public resources. It was levied by the United States during 
several years after the termination of the civil war. 

It follows that if an income-tax could be justly levied, it 
would be the only one which we should impose. But when we 
come to the question of levying it we meet with a practical 
difficulty at the very outset. In order to determine how much 
a man must pay, the government must learn first what his total 
income is. Now, although the amount of one's income can be 
defined with all necessary precision, its actual calculation in 
dollars by government agency involves difficulties which are 
quite insurmountable. The result of these difficulties is that, 
in practice, an income-tax is among the most unjust and demor- 
alizing that the Government of the United States has ever at- 
tempted to levy. Why this is so will be seen by looking more 
closely into the conditions. 

In the first place, it is impossible for any government agency 
to know much of the business of the individual by any investi- 
gation which that agency can conduct. The government must 
therefore depend very largely on the man's own statements. If 
the man can avoid making any statement at all, which he may 
perhaps do by keeping away from the assessor's office, the latter 
will have but little material for a conclusion. It is true that in 
such cases the law requires the assessor to determine the man's 
income in the best way he can, and then to add a considerable 
percentage to his estimate, and tax the man accordingly. But 
it has been decided that this law does not mean that the asses- 



490 APPLICATIONS OF ECONOMIC SCIENCE. [V. 27. 

sor may arbitrarily guess anything lie pleases as the man's in- 
come, but that his estimate must be founded on some sufficient 
data. The result is that if no data can be found, or if those 
found do not correctly indicate the income, the conditions re- 
quired by the law are not fulfilled. What is yet more demor- 
alizing even if the man is caught and brought to the asses- 
sor's office, it is to his interest to estimate his income as low as 
possible. Thus a premium is at oiice offered to dishonesty, 
an act which every government should do all in its power to 
avoid. 

But granting that the government has every facility for in- 
vestigating every man's business, new inequalities arise from 
the fact that the income proper, as defined in economics, may 
be very different from income as determined by legal calcula- 
tions. In the case of persons in receipt of fixed salaries or 
fees the income is perfectly definite, and if the government 
can determine it, it affords a correct basis for the tax. The in- 
equality enters in the case of establishments where several pro- 
ducers work together in unison, and consume a part of their 
own products. An extreme case is that of a large farm with 
a wealthy owner consuming its products. The farmer may, 
from an economic standpoint, be in the actual enjoyment of a 
large income. For example, he has a retinue of servants 
whom he feeds from the produce of his farm. He has his own 
horses and cattle, ancl feeds them from his farm. He owns 
his house, barns, stables, etc., and pays no rent for them. His 
economic income, on which he should be taxed, includes the 
money value of all these sources of enjoyment. But the as- 
sessor can only levy upon the products of his farm which he 
has actually sold, and from these sales the farmer must be al- 
lowed to subtract all that he has paid for cultivation. 

The result of all this is that in practice the agricultural class 
are almost exempt from an income-tax, which is levied mainly 
upon the residents of cities. Among these, salaried and pro- 
fessional men pay much more than their proper share. 



V. 28.] OH TAXATION. 491 

28. We conclude, therefore, that, instead of attempting di- 
rectly to determine the revenue which each man enjoys under 
the protection of the State, a tax must be levied on such visible 
indications of revenue as the agents of the government can find. 
It lias already been pointed out that whenever a tax is levied 
upon a manufactured product the manufacturer can, to a 
greater or less extent, collect the tax from his customers by 
charging a higher price. It is therefore very generally as- 
sumed that, however a tax may be levied, it comes ultimately 
out of the pockets of the community in proportion to their 
ability to pay. 

On the other hand, all taxes on production are often considered 
burdens upon industry. By making the product cost more 
they discourage its consumption, and thus the regular opera- 
tions of commerce may be greatly interfered with. We have 
now to consider the relative merits and demerits of different 
systems of taxation from this point of view. 

The system in vogue in the different States of the Union 
differs from that generally adopted in Europe in that taxes are 
mostly of that class and order which are levied on one's whole 
possessions without regard to their character, while such taxes 
are little known in Europe. There are two reasons for this. 
The strongest one is that taxes on production would immedi- 
ately place the manufacturers of each State levying them at an 
apparent disadvantage in competing with those of the neigh- 
boring States, where the same tax might not be levied. The re- 
sult is that such a tax should be uniform throughout the whole 
country, and this requires that it should be levied by the gen- 
eral government. This leaves only the first and third classes 
open to the States. The personal taxes of the first class are 
wholly insufficient. Hence States fall back upon those of the 
third class by taxing accumulation. It is very natural to meas- 
ure one's ability to pay by his accumulated wealth ; and if we 
regard only this ability, without reference to the indirect con- 
sequence to society, or the practical difficulties in the way of 
determining his wealth, this kind of tax is a very fair one. 



492 APPLICATIONS OF ECONOMIC SCIENCE. [V. 28. 

Such a tax is, however, subject to the same kind of objec- 
tions which have been brought against the income-tax. The 
system has proved such a failure that it is wonderful how our 
State legislatures persist in trying to enforce it. The objec- 
tions are these : 

In the first place, it is impossible to find out what wealth 
every man possesses. The assessors can see and value his 
houses and lands, and can guess at the value of his furniture. 
They may readily find out whether he has horses and car- 
riages, and can guess at their value. When they attempt to 
do more than this, difficulties begin to arise. 

It is obviously necessary that every man shall have the right 
to subtract the debts he owes from the amount of the prop- 
erty which he possesses, in order to determine his actual owner- 
ship. This he is sure to do. On the other hand, the amount 
of the debt should be charged as a part of the property of the 
creditor. This is something which the creditor may or may not 
do, and which it is probable that in the majority of cases he 
does not do. It will cost more to learn the amount due him 
than the labor is worth. U. S. bonds are not taxable under our 
laws. It is said that in the city of New York there is an in- 
creased demand for these bonds at the time when the assessors 
perform their annual duty, caused by the great number of men 
who at that time put their wealth into the form of bonds in 
order to lessen the amount of their taxable property. 

The next objection to this system is that it makes no distinc- 
tion between property employed in reproduction for the bene- 
fit of society, and that employed in one's own private consump- 
tion. Here it is that the system adopted by our States shows 
at its worst. ~Eo doubt the idea that this is a poor man's coun- 
try has to a certain extent given color to our system. But if 
so, the idea has not been intelligently carried out. Since a tax 
must always be levied on something which the assessor can 
find, it follows that the most rational system is that which 
taxes the visible manifestations of wealth. Abroad this prin- 
ciple is fully recognized. The public exhibition of every- 



V. 29.] ON TAXATION. 493 

thing which, indicates rank and position is heavily taxed in 
England. For domestic servants above a certain class, gold 
and silver plate, carriages and horses, the privilege of embla- 
zoning a coat of arms, and other indications of wealth, family, 
and social position, heavy payments must be made. In the 
United States no notice is taken of these exhibitions, but, in- 
stead of doing so, our assessors are engaged in a futile effort to 
learn the sum total of a man's debts, credits, stocks, and bonds. 

29. We shall close with a few general ideas on our sys- 
tem of taxation. The great defect of this system is that it is 
founded only on our natural ideas of what is equitable, and 
that our legislators totally ignore the results of experience as 
to what is really practicable. 

The first step in improving our system will be to give up 
entirely every attempt to tax a man's total possessions, and in- 
deed to give up every idea of an abstractly equitable system. 
Our policy should then be : 

I. To tax nothing the possession of which cannot readily be 
discovered by the assessors. 

II. To tax all visible manifestations of wealth in what the 
old geometers called a duplicate ratio ; that is, in a ratio yet 
higher than that of the amount of wealth manifested. 

III. To tax real estate and other forms of wealth which can- 
not be concealed. 

TV. To tax all products which are designed for the indul- 
gence of the appetites. 

We need scarcely fear that any tax levied according to a 
general law will be permanently inequitable. Take for exam- 
ple the case of real estate. No one is compelled to own it, but 
as all are compelled to use it, it is probable that the owners 
can divide the tax equally among the community. The fact is 
that there is little danger that any reasonable system of taxa- 
tion will be inequitable in the long-run. 



494 APPLICATIONS OF ECONOMIC SCIENCE.. [V. 31. 



CHAPTER IV. 

MONOMETALLISM AND BIMETALLISM. 

30. We assume, in starting, what will be more fully shown 
hereafter, that at the base of every sound system of currency 
must lie a right of the holder of bank-notes or other forms of 
paper currency to demand a definite quantity of something 
having value in exchange for his notes. "We have seen that 
practically the precious metals are the only commodities which 
have hitherto been extensively used for this purpose. We 
have also seen (Book II., Chapter XII.) that the rival monetary 
systems of the present day among the leading commercial na- 
tions are monometallism and bimetallism. 

Monometallism is the system under which a government 
coins onlv a sino-le metal as unlimited legal tender. Theoreti- 
cally this metal may be gold or silver, but practically it is 
only gold among the leading monometallist nations of Europe. 
The bimetallic system permits the unlimited coinage of 
either gold or silver. It also permits payment to any amount 
to be made in either metal at the pleasure of the paying party. 

We have now to consider the relative effects and practica- 
bility of the adoption of these two systems. Before proceed- 
ing to this discussion it is essential that the student should 
have the facts of the case clearly in mind as they have been 
set forth in the chapter already referred to. He will then 
understand the following statement of the point at issue 
between the two parties. We begin with the views of the 
bimetallist. 

31. The Bimetallist View. The ground taken by the 
bimetallist is that if the leading nations will only agree to 
coin silver and gold at any uniform ratio of value previously 



V. 31.] MONOMETALLISM AND BIMETALLISM. 495 

agreed upon, the market value of the two metals -will 
necessarily correspond to this ratio. Suppose, for example, 
that it is agreed that the silver dollar shall weigh sixteen times 
as much as the gold dollar ; that is, that government establishes 
the rule that for monetary purposes the ratio of the value of 
gold to that of an equal weight of silver shall be 16 : 1. Then, 
says the bimetallist, if there is a large increase in the silver- 
supply without any increase in the gold-supply, this increase 
cannot result in any great fall in the price of silver as com- 
pared with gold, because people will then coin silver rather 
than gold, and thus the surplus will all be absorbed in the in- 
crease of the silver money. If, on the other hand, silver be- 
comes comparatively scarce as compared with gold, the only 
result will be that gold rather than silver will be coined ; and 
since a dollar of either metal will equally answer the purpose, 
no preference can arise for one over the other. A condensed 
statement in its extreme form is as follows : 

" The abundant metal is the least demanded. Its tendency 
is to be depreciated, while the scarcer metal becomes dearer. 
But it is evident that if to increased production we can con- 
tinue to oppose increased demand, and to decreased production 
decreased demand, we shall maintain the equilibrium and 
things will remain unchanged. This is precisely what we pro- 
pose to do. For the demand, which, without the adoption of 
the tariff of 15^, would be directed to the metal which is 
scarce, would, if the tariff were anywhere in force, be directed 
to the metal that is abundant. For if the bimetallist law 
permits each and every one to pay his debts at will in gold or 
silver, every one must see that the dealers in money will 
neglect the metal which is hard to find, and will seek for that 
which is plentiful, to have it coined. Moreover, the scarce 
metal, if it is not in demand, will not rise in price, and the 
abundant metal, if active demand springs up, cannot fall." * 



* Cernuschi, as quoted in Wallcer, Money, p. 258, from Bankers,' 1 Maga- 
zine, N. Y., Nov. 1876. 



496 APPLICATIONS OF ECONOMIC SCIENCE. [V. 32. 

The Monometallist View. The ground taken by the mono- 
metallist is that the permanent use of two metals as money 
is impracticable. There is in the great markets of the world 
a certain ratio between the value of a definite weight of gold 
and the value of an equal weight of silver which fluctuates 
from year to year with the supply and demand of the two 
metals. Assume the ratio 16 : 1 to be adopted. If the value 
of gold becomes greater than that of sixteen times its weight 
in silver, the latter, being the cheaper metal, will be preferred 
in payment. Consequently the paying party will not pay in 
gold at all, but will send silver to the mint for coinage in 
order that he may make his payments in silver. The result 
will be that gold will disappear from circulation entirely, and 
we shall not have bimetallism, but silver monometallism. 

If, on the other hand, gold is worth less than sixteen times 
its weight of silver; if, for example, the market ratio is 15 : 1, 
then for the same reason silver will stop circulating as money, 
and we shall have gold monometallism. The result is that 
the system of bimetallism really results in a fluctuation be- 
tween one form of monometallism and another according to 
the supply and demand of the two precious metals thus caus- 
ing unlimited confusion in the course of trade. 

32, Criticism of the Arguments. We need not inquire 
which of these arguments is the stronger, because each of 
them is insufficient, owing to its being founded on one side of 
the case and containing no suggestions how the other side is 
to be taken into account. Each side cites a true cause as the 
basis of its view, and the only way in which a decision can be 
reached is by weighing each cause and thus learning which pre- 
ponderates. This cannot be done with entire precision, be- 
cause the result depends upon matters of fact about which our 
knowledge is extremely limited. It is, however, easy to show 
how the weighing of the two causes should be conducted. 

The arguments of the bimetallist would be perfectly sound 
if the precious metals had no other use than that of being 



V. 32.] MONOMETALLISM AND BIMETALLISM. 497 

coined into money. In such a case, whatever the monetary ratio, 
one kind of a dollar would serve the purpose as well as 
another, even though there should be fifty silver dollars in 
circulation to one of gold. This comparative scarcity of gold 
would no more increase the value of gold dollars than the 
scarcity of a particular kind or tint of gold would increase the 
value of that kind of gold. 

But, as a matter of fact, the precious metals have other uses 
than this, and the fallacy of the bimetallist consists in ignor- 
ing that fact, or rather in claiming, without fully proving the 
claim, that the result of these other uses is insignificant. It 
is quite possible that not more than half the gold and only a 
small fraction of the silver which is now in the world is in 
use as money.* "Wares, jewelry, picture-frames, spoons, the 
filling of teeth, and plate of all kinds continually absorb it. 
Hence the weight of gold in a gold dollar may have a higher 
market value than the weight of silver in a silver dollar, or 
vice versa, according to the demand for the two metals. In 

* This is a subject on which it is difficult to make any general statement, 
partly on account of the somewhat indefinite meaning of the term supply, 
and partly because the state of the case is continually changing. The fact 
is that an unexplained mysteiy now surrounds the question of the stock 
of gold in this country. From the statistics of exports, imports, and coin- 
age during a number of years past, the Director of the Mint estimated the 
stock of gold coin in the country in 1884 to be 552 millions of dollars. Of 
this stock there was held 

By the Treasury 89 millions. 

By national banks 98 

Leading, as is supposed, in other hands 365 " 

552 millions. 

Of this stock, only the 187 millions in the Treasury and the banks can be 
really ascertained to exist; the remaining 365 is supposed to be in circula- 
tion. But in fact no gold at all is in actual circulation from hand to hand 
in the Eastern States, and probably very little in any part of the country east 
of the Rocky Mountains. What has become of all this gold ? Is it hoarded 
or has it been melted down? If the latter, the state of affairs is most seri- 
ous, since it would lead to the conclusion that fully the entire annual gold- 
product of the world is absorbed for other than monetary purposes. 
32 



498 APPLICATIONS OF ECONOMIC SCIENCE. [V. 83. 

such a case, by Gresliam's law, the owners, of gold coin will 
no longer use it wholly as money, but will begin to use it for 
other purposes. The converse will hold true if silver becomes 
more valuable in the market. 

On the other hand, the monometallist is at fault if he 
claims, without proof, that under the bimetallic system either 
all the silver or all the gold necessary for the world's circula- 
tion could be coined without changing the market ratio of the 
two metals. Let us suppose the two metals to be circulating 
as money in equal quantities on a universal bimetallic system. 
Then grant that one of them, say silver, is produced in such 
excess as to cause a fall in its market price. Before it can 
entirely take the place of gold in the circulation, enough of 
the excess must be coined to replace all the gold now in use 
as money, and an equal value of the latter must be withdrawn 
from circulation. It is certain that this cannot be done with- 
out some change in the market value. "Whether the change 
would be such as to keep the market ratio of the two metals 
down to the legal ratio would depend upon how great was the 
excess of silver production compared with the amount which 
would be absorbed in the coinage. This involves questions of 
fact, to be settled by learning the actual state of the case. 

33. The whole question turns upon how the influence of 
the demand for the precious metals for other purposes than 
that of money compares with the influence of their demand 
for the purposes of coinage. To consider the question from 
this point of view we must first point out a great difference 
between what constitutes the supply of the precious metals 
and what constitutes the supply of most other commodities. 
As we have hitherto used the term supply, it has meant 
the quantity of a commodity brought to market during some 
definite unit of time, commonly a year. The reason of this is 
that nearly all commodities reach the hands of the persons 
who are finally to enjoy them, and are thus out of the market, 
within a comparatively brief period of their production. Most 



V. 34.] MONOMETALLISM AND BIMETALLISM. 499 

of the wheat, clothing, and furniture manufactured is sold, and 
in the hands of some person who is keeping it for his use, 
within a year of its final production. In the case of more 
permanent objects, such as houses and farms, although they 
may be in the possession of persons owning and using them, 
they are still to a certain extent in the market for sale or rent, 
so that the supply is not strictly an annual one. In the case 
of the precious metals the supply is yet more permanent, be- 
cause so long as they are used as money they never get into 
any hands which are going to keep them, but remain con- 
tinually in the market. 

Hence the supply of gold dollars does not consist of those 
which have just been coined from the mint and are waiting to 
be paid out, nor of those coined within a year, but of the 
entire mass of gold dollars in the country and in the world. 
Among the gold may be included some that has been passing 
from hand to hand since the days of the Caesars. Thus the 
actual supply of the precious metals is vastly greater than the 
amounts annually produced. Hence it is that their value is 
less dependent upon current production than in the case of 
any other commodity. If a hundred millions is extracted 
from the gold-mines of the world during a year, it is only 
added to a vastly greater existing amount, and thus produces 
little difference in the total supply. 

34. Let us return to the definite proposition of the bimet- 
allists : If the leading nations of the world should agree to 
coin silver and gold without limit on any assumed ratio, the 
residt would he to bring the market ratio down to that of the 
coinage. 

Let us see whether we can test the correctness of this propo- 
sition. For ten years past the market ratio has very generally 
been about 18 : 1. What now will be the consequence of offer- 
ing to every owner of silver the privilege of having it coined 
into money which shall be relatively more valuable in the ratio 
cf 18 : 15 ? Evidently there will be an effort on the part of the 



500 APPLICATIONS OF ECONOMIC SCIENCE. [V. 34* 

owners of silver to get it coined, while gold coinage will, for 
the time, cease. The demand thus created will increase the 
value of silver and diminish that of gold, thus lowering the 
market ratio. "Will it, as the bimetallist claims, lower it to the 
ratio 15 ? Clearly not, because if it did there would no longer 
be any incentive to take it to the mint for coinage. The 
market ratio will therefore stand somewhere between 15 and 
18. The exact point at which it would stand would in the first 
place depend upon the capacity of the mints to coin a con- 
siderable portion of the existing supply of silver bullion. The 
amount of this supply we cannot precisely estimate, but it 
must be several hundred millions of dollars. It is indeed so 
large that the coinage since 1878 of from thirty to forty mil- 
lions annually by the United States Government seems to have 
been without any visible effect upon the silver market. It 
seems, therefore, safe to assume that were the bimetallic theory 
tested, all the mints of the world would be employed to their 
utmost capacity for a period of several years in coining silver. 

Now consider the case of gold. The same reasons which 
would stimulate the coinage of silver would entirely paralyze 
that of gold. Thus the annual supply of the latter metal would 
be thrown upon the market for use in the arts and manufac- 
tures. To what extent would this lower its value as compared 
with silver? To some extent, no doubt; but we cannot tell to 
what extent without more knowledge than we have of the 
actual amount of gold in the world and the actual demand for 
other purposes than that of coinage. 

Would the exclusive coinage of silver be continued until that 
metal alone was the basis for the money of the whole world? 
This would depend upon whether all the silver in the market, 
and all that could be produced and taken to the mints during 
the few years that the coinage was going on, would suffice for 
the money of the world. We do not know whether it would 
suffice or not, and thus we do not know exactly what the out- 
come would be. We could learn by a statistical investigation, 
but even that might not convince the contending parties. 



V. 35.] THE REGULATION OF THE CURRENCY. 501 



CHAPTEK V. 

THE REGULATION OF THE CURRENCY. 

35. The question whether government ought to make any 
provision whatever for regulating the currency, beyond pro- 
tecting each individual against fraud or other wrong on the 
part of those with whom he deals, is an open one. The general 
principles involved in this question have already been so fully 
discussed that they need not be further considered at present. 
In whichever way we decide the question, the fact will remain 
that governments do sometimes undertake to issue currency, 
and to enact laws for its regulation. How strongly soever the 
student may be opposed to any such action on the part of the 
government, it is very essential that he should be able to trace 
the effects of the causes which may be brought into play by 
such action. . Our discussion will not, however, be confined to 
government action, but will include the effect of such policies 
as may be adopted by the banks of the country. 

To form a clear conception of the subject, certain principles 
laid down in the first few chapters of the preceding book are 
to be borne clearly in mind. It has been shown : 

I. That a regular process of transfer of goods and services, 
which we have called the industrial circulation, is always going 
on, and is most necessary to human well-being. 

II. That all such transfers of goods and services have to be 
balanced by a transfer of current money in the opposite direc- 
tion, thus constituting a system of exchangee 

III. That the money or credit passing in one direction must 
measure the value of the goods or services passing in the other 
direction. At the same time, the number of dollars of money 
or credit required for this measure depends upon the scale of 
prices, increasing or diminishing with that scale. 



502 APPLICATIONS OF ECONOMIC SCIENCE. [V. 35. 

IY. Since the scale of prices cannot be fixed by any law, but 
is always a matter of individual bargaining, it follows that we 
cannot assign any definite quantity of money which shall be 
necessary or sufficient to effect all the exchanges of a country. 
If a certain volume of currency is required to transact the 
business of the country on a certain scale of prices, then if all 
prices are doubled, the volume of currency must also be 
doubled, or only half the exchanges can be effected. Conse- 
quently what is really wanted to keep business going at its 
normal rate is a fixed relation between the scale of prices and 
the volume of the currency. 

Y. If from any cause whatever the volume of the currency 
does not correspond to the scale of prices, that fact is made 
known to the public through an apparent excess or deficiency 
in the flow of the currency. A deficiency in the flow is shown 
by merchants not being able to sell their goods at the regular 
rate, and by the laborers of the community not being able to 
find employment at regular wages. All this will result in a 
diminution of wages and prices. An excess in the flow of the 
currency is shown by a brisk purchase of goods, and by such a 
demand for labor that laborers are able to command an increase 
of money wages. 

YI. The apparent advantages and disadvantages thus arising 
are, however, in great part illusory, from the fact that what the 
laborer loses by lower wages he gains by getting his sustenance 
at lower prices, and vice versa. 

YII. Nevertheless, owing to the difficulty of adjusting prices 
to variations in the flow of the currency, it is very essential to 
the public good that the general scale of prices should be kept 
as nearly uniform as possible from year to year. This requires 
that the flow of the currency shall always be accommodated to 
the industrial flow, increasing when the latter increases, and 
diminishing when it diminishes. At the same time it is a 
serious question whether the sum total of the industrial flow 
is subject to much variation from month to month when every- 
thing goes along at its normal rate. It is sometimes supposed 



V.36.] THE REGULATION OF TEE CURRENCY. 503 

by men in business that, at a certain period of eaclx year, the 
" moving of the crops " causes a great increase in the industrial 
flow, requiring for its compensation a corresponding increase 
in the monetary flow. Quite likely this may be true ; and if it 
is, we have an example of a case in which a certain elasticity of 
the currency is required. 

It follows from all this that if the regulation of the cur- 
rency is to be regarded as something for either governments 
or banks to undertake, the main problem involved is that of 
adjusting the monetary to the industrial flow. There must 
be some way by which, when the industrial flow increases, an 
increased volume of currency shall be drawn into the circula- 
tion, to be retired again when the occasion for it has passed. 
To effect this adjustment is supposed to be one of the principal 
functions of banks. When more currency is wanted, it is sup- 
posed that merchants will apply to the banks for loans, thus 
increasing the volume of currency, and hence the monetary 
flow. "When the occasion for the increase has passed away, the 
merchants pay off their loans, and thus the volume and flow of 
the currency are diminished. 

Whether -banks always do perform their functions so as to 
make this adjustment is a question which economists should in? 
vestigate more fully than they have hitherto done. It should 
not be regarded by the student as a settled one, but as one 
which it should be his business, seriously to examine. Our 
present object is to assist him by suggesting some ideas and 
discussing some theories which will come into play in the in- 
vestigation. 

36. One of the advantages of banks has been supposed to 
be that of economizing the use of gold and silver. If the lat- 
ter were alone used as currency, we should have a capital equal 
to the whole volume of the currency lying idle, and gaining no 
interest. If one has a twenty-dollar gold piece in his purse, 
he necessarily loses the interest upon it as long as he keeps 
it. The same is true of the man to whom he transfers it. 



504 APPLICATIONS OF ECONOMIC SCIENCE. \Y. 36. 

The same is true of every piece of coined money issued from 
the mint. Thus in a certain sense the whole stock of coined gold 
and silver may be regarded as so much idle capital. The cur- 
rent theory -is that in so far as this gold and silver is replaced 
by bank-notes, so far is interest gained on that portion of the 
capital of the country which is in use as money. Adam Smith 
compared the necessity of employing this dead capital to that 
of taking a certain portion of the land of the country for roads, 
and then likened the substitution of bank-notes for the gold 
and silver to the construction of a road through the air, which 
would permit the land previously occupied by roads to be cul- 
tivated, thus making an actual addition to the productive 
wealth of the country. 

J3ut this theory is at the best far from satisfactory. Who 
gains by this substitution \ Every holder of a circulating note 
loses interest on his investment in that note while it stays in 
his pocket, unless it bears interest, which bank-notes never do. 
Therefore the holder of a bank-note loses the interest as Com- 
pletely as if he had coin instead of the note. What is really 
saved by the substitution is the wear and tear of the gold and 
silver coin. In consequence of this wear and tear, all such 
coin is subject to a slight continuous loss, which the public 
must bear when the coin becomes too light for circulation. 
We may consider each man's share of that loss to be equal to 
the wear and tear of the coin while it is in his pocket. 

Therefore whatever gains result from the substitution of 
bank-notes for coin must accrue to the benefit of the banks 
or other issuer of the notes. If they gained more than the 
regular interest on their invested capital, there would be an 
actual gain to the public by the issue of notes. It may be 
questioned, however, whether they do have any such extra 
gain. The general rule probably is that the expenses incident 
to the issue of the notes, and the management of the business, 
absorb all the profits. 

Here a very important point is to be considered. We may 
readily believe that if all the circulating notes of the country 



V. 37.] THE REGULATION OF THE CURRENCY. 505 

were issued from a single central institution, a not inconsider- 
able profit could be made by that institution out of the busi- 
ness. For example, there are now circulating in the United 
States about 600 million dollars in government and bank 
notes. If we subtract 25 per centum of this as a coin reserve 
to be held for their payment, there will remain 450 millions, 
on which the issuing authority could gain interest. Putting 
this interest at 3^- per cent per annum, the amount gained 
would be 15 millions per annum. This would no doubt more 
than pay all the expenses of the issue, were it made by only 
a single institution. But when made by several hundred banks, 
each separately responsible for its own share, the expense is so 
far increased that most of the banks find little or no advan- 
tage from the issue. The government gains an advantage from 
its issue of notes by having these notes form a part of the pub- 
lic debt on which no interest is paid. 

3T. Another consideration is that the continually increas- 
ing volume of credit used instead of coined money has resulted 
in the general volume of circulation for the world being sev- 
eral times larger than it would have been had bank credits not 
been used as money. Since, as already pointed out, this whole 
volume of currency is necessary to the transaction of the 
world's business on the present scale of prices, it follows that 
our present scale is much higher than it would have been but 
for the employment of credit-currency. 

The fact is that the world's business, or, as we have called it, 
the world's industrial circulation, has grown much more rap- 
idly than its stock of coin. The result of this is that the mon- 
etary and industrial flows could not have been balanced with- 
out a continuous fall of prices, but for the use of credit-cur- 
rency. The use of this currency has resulted in the whole 
gold-supply not being necessary to the transaction of business. 
In consequence, a considerable portion of the gold-supply has 
been available for other purposes than that of money ; watches, 
jewelry, and picture-frames, for example. "We are therefore to 



506 APPLICATIONS OF ECONOMIC SCIENCE. [V. 38. 

regard our ability to command these articles of luxury as beino- 
due in a great measure to the economy introduced by the credit 
system. The general benefits to the country rendered by the 
credit system are therefore that an increased business is trans- 
acted without an increased scale of prices, and that an impor- 
tant part of the world's supply of the precious metals has been 
available for use in manufactures and the arts. 

38. Irredeemable Paper Money. The kind of circulating 
notes winch we have hitherto considered have been those en- 
titling the holder to receive a certain amount of coin at the 
counter of a bank. They are in fact nothing but promissory 
notes, payable on demand, and deriving their value from the 
ability of the bank to pay them whenever presented. It has, 
however, been shown that the transaction of the business of the 
country requires a certain, volume of currency to be continually 
in a state approximating to that of flow, being held first by 
one person and then by another. In other words, it is passing 
from hand to hand, and is received by one person only to be 
paid to another. Now, so far as the immediate results are con- 
cerned, it makes no .difference to the payers and receivers 
whether the money thus flowing is coin, bank-notes, or credit. 
Hence a certain amount <of money will always remain in circu- 
lation, and if it is credit-money, the payment of the credit in 
coin may never be demanded. 

The result of this state of things is that when a government 
is in a difficulty, or is financiall}' weak, it may issue a limited 
volume of its own notes with the reasonable assurance that 
they will pass for a certain time from hand to hand without 
the holders demanding payment. By the device of making 
them a legal tender a forced circulation is given them, quite 
irrespective of their money value, or of the power of the gov- 
ernment to redeem them. If the volume issued becomes so 
great that the notes depreciate, then, in accordance with Gresh- 
am's law, they will displace all other good notes, or credit re- 
deemable in coin, and thus may become the basis of the entire 



V.39.] TEE REGULATION OF TEE CURRENCY. 507 

circulating medium of the country. Such notes are sometimes 
called paper money. Such money was the " greenbacks " of 
the United States issued during the civil war, the redemption 
of which in coin was not formally undertaken until 1879. 

39. The possibility of a system of irredeemable paper mon- 
ey being a subject of public discussion, it is necessary that we 
should have a clear understanding of the laws which regulate 
its value and adaptability. On this subject two opposite opin- 
ions are current. One opinion is that such currency would 
perform all the functions of a circulating medium, if the gov- 
ernment would only issue it, and call its units by the name of 
dollars. After the commercial panic of 1873 a political party 
was formed in many States of the Union, the object of which 
was to make the circulating notes issued by the government 
forever irredeemable in coin. The existing notes were prom- 
ises to pay the bearer the amounts named on their faces ; but 
by common consent the government was postponing the re- 
demption of this promise until a more convenient season. Gen- 
eral B. F. Butler, one of the leaders of the new party, saw the 
absurdity of having a promise afloat which might never be per- 
formed, and therefore proposed that the notes, instead of bear- 
ing such a promise, should be declared money in themselves, 
and called certificates of value. Then a dollar note would be 
simply a piece of engraved paper issued by the government 
and bearing on its face a certificate that it was really one dollar 
and should be legal tender to that amount for all payments 
made under the laws of the United States. This view was the 
strictly logical consequence of the theory already discussed, 
that money derives its value from the fiat of the government. 
The reader may be supposed so well able to grapple with this 
theory that we shall leave him untrammelled in its discussion. 

The opposing theory is that an irredeemable paper money 
has no value except that which it derives from the hope of be- 
ing redeemed at some future time. Hence the more remote 
the process of redemption the less the value. This view might 



508 APPLICATIONS OF ECONOMIC SCIENCE. [V. 40. 

appear to be borne out by the facts of history. The general 
rule has been that such notes are issued only by governments in 
difficulties, and in such quantities that their redemption be- 
comes more and more doubtful. Thus the assignats of the 
French Revolution, the " Continental currency" issued by our 
own government during the Revolutionary War, and the cir- 
culating notes of the Southern Confederacy, all became value- 
less as it became certain that they would not be redeemed. 

40. Although this view is nearer the truth than the other, 
it is not entirely sound. Under certain conditions an irredeem- 
able paper currency may have the value and perform the func- 
tions of money, although it is certain that it will never be re- 
deemed. What these conditions are may be learned from the 
principles already developed in treating of the volume and 
flow of the currency. 

We have seen that it is absolutely necessary to the transac- 
tion of the business of the country that a certain volume of 
currency should be in circulation. It is impossible that the 
exchanges of the United States should be conducted without a 
volume of currency the value of which, measured by our pres- 
ent standard, would be about fifteen dollars for each inhabitant. 
Hence, whatever bills or tokens the people use in making their 
exchanges, it is certain that so long as the exchanges go on, 
the total volume of those bills or tokens will have a certain 
absolute value. It follows that the first essential condition of 
value of a paper currency is that it shall be generally accepted 
in trade as money. It must therefore either be a legal tender 
by law, or received so generally as a matter of custom that it 
will be refused only in exceptional cases. In times of great 
popular excitement the force of public opinion alone suffices 
to give a forced circulation to such money. 

The money being universally accepted, the next condition on 
which its value depends is its total amount. If strictly limited 
to an amount not exceeding that required for the transaction 
of the current business of the community, it will not depreciate. 



V.40.] THE REGULATION OF TEE CURRENCY. 509 

Here, however, a question will arise in the mind of the crit- 
ical student. It has been shown in a preceding chapter that 
there is no definite volume of currency necessary to transact 
the business of the country, and that this business can be as 
well transacted with one volume as with another, always pro- 
vided that the scale of prices is adjusted to the volume. The 
expression, " amount of currency required to transact the busi- 
ness of the country," therefore needs to be precisely defined. 

We start, then, with the proposition that whatever be the 
volume of irredeemable currency, it will fulfil all the functions 
of a circulating medium on a certain scale of prices correspond- 
ing to its volume. If the volume is less than fifteen dollars for 
each inhabitant, this scale of prices will be below prices in gold. 
If gold coin were not receivable as money, it would then be at 
a positive discount as compared with the paper money which 
we suppose to be so receivable. But being receivable, we 
should, in the case supposed, have a mixed currency of paper 
and gold. If we continually add to the volume of the paper 
Currency, it will at length amount to fifteen dollars for each in- 
habitant, and will then suffice to transact all the business of the 
country on the gold scale of prices. If we add still further to 
the volume, gold will entirely disappear from circulation, and 
will be at a premium, in accordance with Gresham's law. With 
every further addition there will be a further depreciation : 
doubling the volume will simply double all prices as measured 
by currency. To speak more accurately, the standard of meas- 
ure, or the dollar, will be reduced to one half its value. The 
theorem just enunciated may therefore be expressed with 
greater precision, as follows: So long as the total volume of 
irredeemable currencies of all kinds does not exceed that neces- 
sary to transact the business of the country on a coin scale of 
prices, so long the currencies will not depreciate. 

It follows, therefore, that could a strictly limited volume of 
irredeemable paper currency be issued, it would perform all 
the functions of money. Unfortunately, as human nature is 
constituted, the experiment of such an issue would be a very 



510 APPLICATIONS OF ECONOMIC SCIENCE. [V. 41. 

dangerous one. The experiment can at present have no object 
but that of making money more plentiful, and the more plen- 
tiful we make it the higher prices will be, and the greater the 
volume of currency that will be required to transact the busi- 
ness of the country. Hence the same reason which will 
prompt one issue will lead to another, and so on until the 
whole fabric collapses in ruin. 

41. The regulation of the currency through the action of 
banks is seen at its best in the working of the Bank of Eng- 
land. The criterion by which the governors of this institu- 
tion judge of the state of the currency is simply the demand 
for gold from their vaults. The bank has a variable volume of 
credit outstanding, payable to its creditors on demand, either 
in bank-notes or in coin. Since the bank-notes are themselves 
payable in coin, this whole mass of credit is thus payable. 

The object which the governors keep before them is to allow 
the mass of credit to be as large as is consistent with entire se- 
curity against such a withdrawal of coin as might endanger 
their ability to make good all their obligations on demand. 
The instrumentality through which they regulate the volume 
of their credits is the rate of interest. When the demand for 
coin by their creditors exceeds the deposits of coin, they know 
that it is being withdrawn for export. They conclude, there- 
fore, that there is a larger volume of credit in circulation than 
is necessary for the transaction of the home business on the ex- 
isting scale of prices. They therefore raise the rate of interest 
on loans. The result of this is that their customers are dis- 
couraged from borrowing, and thus a moral force is brought 
into play which tends to diminish the volume of credit cur- 
rency. This checks the ability of the public to pay, and so 
lessens the demand for goods. The system may therefore be 
considered as acting much like the governor of a steam-engine, 
which closes the throttle-valve as soon as the engine begins to 
go too fast, and opens it again when the speed is reduced to 
the proper limit. 



V.42.] THE REGULATION OF THE CURRENCY. 5H 

In the United States the banks were long prevented from 
performing this function in the same manner through the 
existence among us of an idea which has come down to us 
from the dark ages, that the rate of interest should be limited 
by law. The national banks are prohibited from charging a 
higher rate than the laws of the State in which they are lo- 
cated. This limiting rate varies from six to ten per cent. 
Owing to the great fall in the rate of interest since 1875, 
this restriction has practically ceased to do any mischief, since 
the market rate would seldom exceed that fixed by law. Un- 
der the system of the Bank of England,, and of all banks un- 
restricted by usury laws, the credit is allowed to the person 
who will pay the highest rate of interest, regard being had, of 
course, to the security which he offers. In the case of banks 
restricted by such laws, if, at the maximum rate allowed by 
law, the demand for credit exceeds that which the banks#can 
supply, loans become a matter of favor, and the banks give the 
preference to those who have been its best customers. The 
result is that the unfavored part of the community cannot get 
money at any price whatever. 

42. The effect of the method of regulation which we have 
described is to keep the general scale of prices somewhere near 
the average gold prices of the world at large. It is one of the 
unsettled questions of political economy whether this system 
of regulation is really of any benefit to the public. It may be 
held that banks really foster injurious changes in the general 
scale of prices at the moment when those changes are most se- 
verely felt, namely, in times of commercial panic and depression. 
These are the times when the flow of the currency least suf- 
fices to transact the business of the country, but they are also 
the times when banks are compelled to be most careful in 
making loans. "What is wanted is some source of currency 
which shall be available only when a commercial panic is 
threatened. Plans for this can be discussed with advantage 
when the public are more enlightened on general principles. 



512 APPLICATIONS OF ECONOMIC SCIENCE. [V. 43. 



CHAPTER VI. 

OF SOCIALISTIC IDEAS. 

43. There are men who hold that the present organization 
of society is not that best adapted to promote the general wel- 
fare. These men are so numerous, and so frequently heard, 
that their views demand the careful attention of the student. 
To see in what respect it is proposed to change the existing 
system, we remark that the fundamental principle of the latter 
is that of individual liberty, or individualism; not indeed un- 
limited liberty, but liberty within certain limits laid down by 
law. To put the principle into another shape, every man is re- 
garded as the master of his own destiny. This is the under- 
lying idea of the let-alone principle. 

Socialism is a general term applied to a number of systems 
which propose that society, by orgahized action, shall force the 
individual to surrender his liberty, or, what amounts to the same 
thing, his right to the unconditional acquisition and use of 
property, for the general good. These systems are founded 
on the belief that the great inequality now seen in the distri- 
bution of wealth should be lessened, and that an effort should 
be made to effect this distribution on certain supposed princi- 
ples of equity. Such views find very strong support in the 
philanthropic sentiments of mankind. There is a single man 
in New York whose income would suffice to feed and clothe 
fifty thousand families. In that same city there are more than 
that number of families working hard to make both ends meet, 
and a very considerable number living in squalor and misery. 
On a superficial view there is no apparent difference between 
the constitution of this rich man and of his poorer neighbors 
which would justify such inequality in the wealth they possess. 
It is therefore natural to suppose that a system which would 



V. 44.] OF SOCIALISTIC IDEAS. 513 

distribute his surplus wealth among the poor and unfortunate 
would tend to the general good. 

In connection with socialism we have to consider the view of 
the "labor party," the members of which do not call them- 
selves socialists, and do not propose any radically new system, 
but are simply engaged in a vigorous effort to secure for 
the laborer a larger share of the product of labor than he can 
command under the actual system. Although this class has 
no system of its own, it has a certain way of thinking which 
is so nearly identical with the way of thinking of the socialists 
proper that both may be considered together. The object of 
the present chapter is to inquire whether any system intended 
to limit the liberty of any man to acquire all the wealth he can 
by legal means, and to employ it in the way he chooses, can con- 
duce to the general good. 

44. "We have in the first place to point out certain wide- 
spread popular errors which lead to the impression that our 
present system is not that most conducive to the public good. 
The mere correction of these errors will go far towards putting 
us on the right track, and will make it less necessary than it 
otherwise would be to consider the views of socialists in detail. 

The first error is that of tacitly supposing that the inequality 
now existing in the ownership of wealth indicates a correspond- 
ing inequality in its enjoyment. Let us suppose the income of 
the richest man in New York to be ten millions of dollars, and 
that of each day-laborer to be five hundred dollars. If their 
consumption of the products of labor were proportional to 
their income, Mr. Yanderbilt's family would consume anriually 
perhaps 100,000 barrels of flour, 10,000 suits of clothes, and 
so on ; or at least the equivalent in value of these quantities of 
flour and clothing. J3ut nothing of the sort takes place. The 
rich consume but little more of the necessaries of life than the 
poor. All that the wealthiest man gets to live on is his house, 
with its furniture and decorations, the food he eats, the clothes 
he wears, and the articles which contribute to his comfort and 
33 



514 APPLICATIONS OF ECONOMIC SCIENCE. [V. 44. 

convenience. As already shown, all his surplus income above 
this is not consumed by him, but is directly or indirectly ex- 
pended in employing laborers to build more houses, factories, 
mills, railways and locomotives, to clear more farms and to dig 
more mines — in a word, to increase the general supply of all 
the commodities required by men in general (Book 1Y., 
Chapter IX.). What society really expends in the support of 
Mr. Vanderbilt is only the commodities which he takes out of 
the general storehouse for his own consumption. 

The second error is that of forgetting that under the existing 
system each individual is engaged as advantageously as circum- 
stances admit of in the production of the necessaries of life to 
be consumed by others ; and that no change in that system 
could result in a more abundant general supply of the neces- 
saries of life. The utmost that could be done by the change 
would be to allow some classes to consume more and others 
fewer commodities. 

A third mistake is that of supposing that the condition of the 
laboring class has not improved with the advance in the arts of 
production during the last two or three centuries. This mis- 
take is about a matter of fact so clear and simple that its mis- 
apprehension can only be considered as an extraordinary case 
of mental blindness, suggestive of the danger of intrusting 
the improvement of society to men who cannot see. Every 
one who has taken the trouble to inquire into the actual state 
of society a few centuries ago knows that the condition of the 
laborer was about this : He lived in a hovel with hardly an}-- 
thing which we would call a window, with the fire (if he ever 
had any) in the middle of the building, or perhaps in a chimney- 
piece at one end. This hovel he occupied in common with the 
pigs and poultry. His staple article of food was a kind of black 
bread which a negro of to-day would hardly offer his dog, with 
a few vegetables from the neighboring garden. The clothing 
of himself and wife was coarse, scanty, and dirty almost in the 
same proportion. 

Coming nearer to our own times and our own country, we have 



V. 44] OF SOCIALISTIC IDEAS. 515 

a •well-known fact still -within the memory of our older men 
which shows the improvement in the comfort of the poorer 
classes in a yet simpler light. In the early part of this cen- 
tury the clothing for all but well-to-do families had to be 
made by the female members of each family. They helped to 
shear the sheep, they spun the wool, wove the cloth, and cut 
and sewed the clothes. Such clothing was called "home- 
spun," a term familiar even to the present day. Coming down 
to the present, it would now be difficult to find within the limits 
of the United States a family who found such labor necessary. 
The wife of the poorest day-laborer in our land would rebel at 
the task of spinning and weaving the material for her hus- 
band's clothes. What object would there be in undertaking 
such a task, when with the wages of a week's labor the man 
can buy himself a ready-made suit of clothes which will 
last him a year with no other help from the wife than mendino- 
and sewing on buttons ? 

The improvement in the quantity of food available is not 
less remarkable than in that of clothing. Three or four days' 
work of the average laborer will now buy him a barrel of flour 
and more than a barrel of corn-meal ; that is, a month's supply 
of bread for an average family. A week's labor will buy 
him a half-barrel of pork. 

The fourth mistake is that of overlooking the relative im- 
portance of the different requirements of production, and 
regarding the functions of the laborer as the only ones to be 
considered. This is an exceedingly natural mistake. When 
we trace back the operations through which a coat or any other 
commodity was produced, we find them all to be ultimately 
resolved into human labor. But we see in the same connection 
that conjoined with the merely manual labor, which was the 
immediate instrument, there were other agencies of equal im- 
portance which might be called labor, but which are overlooked 
by the socialist and labor-reformer. These are the functions 
of the inventor who shows how improvements in production 
can be made : of the capitalist who saves up his income and 



516 APPLICATIONS OF ECONOMIC SCIENCE. [V.45. 

employs it in putting the ideas of the inventor into practice ; 
of the managers who organize the work of the laborers. "With- 
out these three classes of men the great class of mere laborers 
would never have made any advance, but would have been still 
living in the same miserable style that they lived in one or 
two hundred years ago. That is, the great improvement in 
the condition of the laborer which the present generation wit- 
nesses is not the work of himself, but of men of a higher order. 

45. The fact is that on our present system the enjoyment 
of the collected wealth of the community is as nearly in accord 
with the ideal principles of equity as any general system can 
be. It is a great mistake to suppose that the enormous ine- 
qualities which we see in wealth imply anything wrong in the 
system which permits them. When we speak of principles of 
equity, we mean principles which have their rise in the consti- 
tution of human nature. At the bottom of all these principles 
is one which we have already several times alluded to or de- 
fined : the feeling in the breast of every well-organized man 
that he is entitled to make the best use of the faculties with 
which nature has endowed him for his own advancement, and 
that so long as he gives to others a full equivalent for the 
benefits that he receives from them, his fellow-men have no 
other claim upon him. "We have shown that under our present 
system no one can, as a general rule, command from others 
more that the equivalent of the good he does them. But we 
may explain the matter again from a somewhat wider point of 
view. 

"When we speak of equivalents between services rendered we 
presuppose some system by which we may measure the values 
of the respective services. The economic measure of value 
already defined and investigated is in the direction of equity. 
True, they result in the value of the service being measured 
not merely by its character in itself considered, but by its 
scarcity. But this system of estimation is perfectly equitable. 
To a man who kindly offers to supply me with several hogs- 



Y. 45.] OF SOCIALISTIC IDEAS. 517 

beads of air to breathe, I may say with perfect reason, " I bave 
all the air I want already, and your services, whatever the cost, 
are of no use to me. I therefore decline to pay you for the 
labor you bave spent in bringing me the air." 

To take an extreme case of the contrary kind, suppose I am 
defendant in a suit at law, the loss of which will reduce me to 
penury. If a lawyer by his good advice shows me how to gain 
the suit, it would be inequitable and unreasonable should I say 
to him, " These services cost you only two or three days' labor 
all told; I will therefore only pay you the value of two or three 
days of my labor." It would be inequitable, because what- 
ever is the maximum amount which I would be willing to pay 
rather than be deprived of his advice, that maximum repre- 
sents the extreme value of the services which he renders me. 
So far as we two are concerned, that amount represents the 
good which he does me. Therefore, by such amount as that 
which I actually pay him falls short of this ideal maximum 
(and the competition of different lawyers for my case may 
make it fall very far below that amount), by just so much am 
I the gainer through the legal talent of lawyers in general. 
I have therefore no right to complain, though I have to pay 
my lawyer for three days' work what would cost me as many 
months. And we may see in general that if society stands in 
great need of, or will derive great advantage from, services 
which only a very few men can render, it is perfectly equitable 
that these men should command from society a return com- 
mensurate with the paucity of their numbers. Any other sys- 
tem would presuppose obligations on their part towards soci- 
ety, without corresponding obligations on the part of society 
towards them. 

The practice of competition continually tends to reduce to 
a minimum the equivalent which men can charge for their ser- 
vices. This also is in perfect accord with equity, since, as the 
number of persons who can render any services increases, the 
relative importance of each person diminishes. Thus, even 



518 APPLICATIONS OF ECONOMIC SCIENCE. [V. 46. 

from an idealistic point of view, nothing can be said against 
the genera] equity of the existing system of free competition. 

There might indeed be exceptional cases of great hardship, 
as when one person takes advantage of some temporary but 
urgent want of another. It would be a great hardship for a 
bystander to demand from a drowning man his whole fortune 
as the equivalent of pulling him out of the water. But the 
customs and tendencies of society do not permit of these ex- 
ceptional cases being taken advantage of in practice. The 
men who conduct the business of the world find it to conduce 
to their prosperity and peace of mind to conduct their affairs 
on broad general principles, without seeking to take undue 
advantage of exceptional cases. 

It is also to be remembered that the existing system insures 
the employment of every man in the way best suited to his 
talents better than any other system possibly can. This fact 
follows from almost the whole system of political economy, so 
that it need not be dwelt upon. The result is that the great 
mass of producers who make up the working classes of the 
world will combine in the most advantageous way. 

46. Although the present system seems the best one im- 
aginable in its general arrangements, it by no means follows 
that it is best in every detail. "We have shown that there 
may be exceptional cases. One point where doubt of the uni- 
versal equity of the existing system may arise is made when 
we find artificial means adopted to prevent that competition 
which insures society against being required to pay for indi- 
vidual services more than they are worth, and to create arti- 
ficial monopolies. Such a case arises when a telegraph com- 
pany charges so high for its messages that its lines are idle 
a considerable portion of the time ; when mechanics combine 
to abstain from work in order that they may command more 
from society than the equivalent which would be fixed by free 
competition, and to limit the number of persons who can 
learn a trade. But it has not yet been shown that anything 



V. 47.] OF SOCIALISTIC IDEAS. 519 

would be gained by attempts to prevent such combinations 
through legal action. 

In this connection there is an historical fact still existing and 
not to be lost sight of. As a general rule those improvements 
in the process of manufacture which have resulted in so large 
an increase in the production of cotton and woollen goods that 
the poorest man in the land can now wear a white shirt on 
Sunday, and warm clothing all winter, have uniformly met 
with a bitter opposition from the class to which labor- reform- 
ers belong. Even now nothing is more common than com- 
binations against cheap methods of production. These com- 
binations are at war with the good of society in general, and 
especially with the good of the poorer class of laborers. The 
greatest want of this class, at least in our large cities, is more 
house-room. If the organized efforts of philanthropists were 
directed rationally, this would be the point first aimed at. But 
instead of the efforts of labor-reformers being aimed in this 
direction, we find that nearly all the artisans engaged in doing 
the work necessary to the construction of a house are formed 
into organizations whose object is to limit in every way the 
building of houses. They seek to prescribe the number of 
boys who shall be allowed to learn how to lay bricks, or 
plaster, or do anything else requiring skill. 

4t. The inquiry now presents itself, What system would 
socialists substitute for the existing one ? This inquiry it is 
impossible to answer within the limits of the present chapter, 
for the reason that the systems which have been proposed are 
too numerous and too indefinite to be described and discussed 
in detail. The most celebrated ones are founded on theories 
of the perfection of human nature which, however beautiful 
they may be as creations of the fancy, have nothing to cor- 
respond to them in the world we live in. Time would be 
wasted in discussing such systems, for the simple reason that 
it would be vain trying to instruct any man whose common- 
sense would not suffice to show him their impracticability. 



520 APPLICATIONS OF ECONOMIC SCIENCE. [V. 48. 

The danger which now threatens society in this direction does 
not come from the propounders of new systems, but from 
popular efforts to make such changes in the details of our 
present system as it is supposed may remedy the evils which 
surround us. The way most thoroughly to dispose of the 
subject is to inquire by what means and to what extent it 
would be possible for the wisest, most beneficent, and most 
powerful government, a government which could do anything 
it pleased, to improve on the present state of things. Let us 
then suppose such a government to set out to remedy all the 
evils that we so frequently hear about, and to start mankind 
on the road to happiness. 

48. The first object aimed at by socialists is that every man 
shall be enabled to gain a living and to secure his develop- 
ment. The question would then arise, What shall we consider 
a living? One of the first classes to be considered would be 
the poor blacks of the South. But even these are making 
some sort of a living, and in fact as much of a living as they 
really want to make. "When the beneficent government sent 
its representatives among them, they would soon discover that 
the sole wants of the beneficiaries were a certain annual supply 
of corn, chickens, and other products to eat, a few old clothes 
to cover their backs, and some poor shelter from the weather. 
Just as much work as is necessary to secure these necessaries 
the typical black man is willing to perform ; more is laborious, 
and he will not perform it unless forced to do so. Now, what 
shall the government do with him? Give him more food, 
better clothes, and a better house than he really needs ? Then 
food, clothing, and houses must be taken from somebody else 
for his benefit. Shall he be forced to do more work in order 
to render an equivalent for the increased supply of necessaries 
given him ? This would be doing him a great wrong. If he 
is not to be his own judge of the work he shall do, he is sim- 
ply a slave. As for development : why should he be de- 
veloped ? He does not want to be, and it would be doing him 



V. 48.] OF SOCIALISTIC IDEAS. 521 

an injury to try to fit liim for a higher sphere. He is happier 
with his violin than he would be in the Astor Library, and if 
we wish to fit the race for higher pursuits we had better begin 
with more promising stock. 

The beneficent government next turns its attention to the 
tenement-houses of New York City, where several hundred 
thousand poor are confined in insufficient and unhealthy quar- 
ters. "What shall be done with them ? Shall they be put 
into larger houses where they will have more air and room ? 
Then somebody must build the houses. Bricklayers, carpen- 
ters, and masons must be induced to go to work, and the 
beneficent government must make provision for feeding and 
clothing them while they are building houses for the poor. 
Just as the houses are started the bricklayers organize a strike. 
What is the government to do ? Decree that they shall not 
strike, but be satisfied with such subsistence as the government 
can give them ? This will be treating them a great deal worse 
than modern society has ever done. The latter induces them 
to work if it can, but never forces them to accept conditions 
against their will. 

Perhaps the beneficent government meets the demand by 
giving them more flour, meat, and clothing, and thus induces 
them to continue work. But where are the food and clothing 
to come from? Perhaps the government will ransack the 
houses of the wealthy to seize the stores of food and clothing 
reaped by their wealth. But they would be greatly disappointed, 
and might find these stores not materially greater here than in 
any other houses. The next resource would be to tax people 
in general, and the wealthy in particular, to raise money to 
purchase flour for the bricklayers. We anticipate no difficulty 
on the part of the government in collecting the tax to any 
amount, because we suppose its power unlimited ; but we do 
not assign it the faculty of making something out of nothing. 
Therefore if the wealthy are taxed, the money which they can 
spend in other directions will be diminished by exactly the 
amount of the tax. The wealthy man of leisure must there- 



522 APPLICATIONS OF ECONOMIC SCIENCE. [V. 48. 

fore discharge some of his servants, and thus throw them out 
of employment. The railway owner must stop building loco- 
motives and rolling-stock for his railways, giving to the gov- 
ernment for the bricklayers the money he would have expended 
in this direction. The result is that the builders of locomotives 
and cars will find their wages diminished, or perhaps they will 
be thrown out of employment. Then, when the government 
took the money and bought flour for the bricklayers, it would 
come into direct competition with the very occupants of the 
tenement-house whom it was trying to relieve, and who wanted 
all the flour they could get. Thus the supply of flour would 
be diminished, the price would rise, and all the poorly fed, 
clothed, and housed poor would for the time being be worse 
ofE than before. The final result would be that the cost of 
building the tenement-house would come out of servants, build- 
ers of locomotives, and the occupants of the houses themselves, 
no matter what arrangements the government might make. 

Our government next tries a third step. It finds that the rail- 
ways of the country are very largely owned by a few wealthy 
men who ought not to be allowed the enjoyment of so much 
wealth, and therefore determines to confiscate their property. 
It therefore seizes all the railways, and declares that the latter 
are hereafter to be run exclusively for the public benefit and 
are to belong to the public. But how much better off would 
the public be? Shall everybody who wants to ride be carried 
free? USTo, because then the railway will have no income to 
pay the men who run it. Shall it charge the same price as be- 
fore for transportation ? Then nobody will be any better off. 
Shall it lower the rate ? By whatever amount it lowers the rate, 
there will be so much less money to pay the employes who 
manage it and keep it in repair. Making the best possible sup- 
position, and assuming that the government could manage the 
road as well as the stockholders, all that could possibly be gained 
would be the dividends received by the stockholders. This 
will be so insignificant, when compared with the total transac- 
tions of the road, that it is not worth considering. But even 



y. 4 8 .] OF SOCIALISTIC IDEAS. 523 

if saved, bow would society be better off? The stockholders 
generally spend their dividends in improving their own or some 
other roads, or in building bouses or improving farms. If the 
government stops the dividends, tben these improvements must 
also stop, and thus the capacity of the country at large must be 

diminished. 

In this argument we have introduced the supposition that 
the railway could be as well managed by the government as by 
the stockholders. As governments go, this supposition is al- 
most absurd. Every man of common-sense knows that the 
management would be a great deal worse rather than better. 

Finding it impossible to supply the occupants of the tene- 
ment-houses with better quarters without injuring other classes 
of laborers, what shall our government try next? Shall the 
occupants of the tenement-houses be removed to the country 
where they may have more fresh air? The very fact that they 
live in the city shows that they prefer city to farm life. In 
removing them the government would therefore be overruling 
their ow°n wishes, which, to say nothing of the wrong of it, 
would produce speedy revolution. 

But could not our government do something by employing 
the poor of the great cities, thus enabling them to help them- 
selves? Everywhere we see hundreds and thousands of people 
out of employment and seeking for something to do. We have 
shown that there is one way by which these people may get 
employment, and that is by going to work on the very best 
terms "they can command. Can the government do anything 
better for them ? The only measure that any one proposes is 
that the government shall hire them to do something. But in 
order to pay them wages government must levy taxes. This 
tax would be taken right out of the monetary circulation, and 
would cause a diminution in the ability of the taxpayers to 
employ labor exactly equal to the increase in the power of the 
government to do so. Thus, at best, the injury would equal 
the benefit. 

But the question would arise, In what labor would the gov- 



524 APPLICATIONS OF ECONOMIC SCIENCE. \Y. 50. 

ernment employ the men ? In breaking stone, which nobody 
wants broken ? If so, it would be a waste of labor, and the sole 
effect of the operation would be to enable the laborers to eat 
food without producing an equivalent, and thus to diminish 
the amount of subsistence available for other laborers. Shall 
they break stone that somebody wants broken ? Then the inter- 
vention of the government will not be required, because if any- 
body wants stone broken he will himself hire laborers to do it. 

49. All projects of the class we have been describing can 
be most clearly analyzed by looking at the whole subject from 
a communistic standpoint, as in Book II., Chapter IX., and by 
considering the distribution of the products of labor among the 
various classes of society from the point of view there taken. 
The fact is that, under the present arrangements, men are work- 
ing for each other in the most effective way that it would be 
possible for them to work under the supervision of the wisest 
government. We have already a system of socialism marvel- 
lous in its perfection. The most admirable feature of it is that 
those propensities of men which we consider most selfish lead 
them to work for the good of their fellow-men. The men of 
wealth who employ their money in building houses, managing 
railways, and sailing ships are great public benefactors, engaged 
in supplying thousands and even millions of their fellow-men 
with shelter and with the means to make journeys and to pro- 
cure sustenance from all parts of the world. Those who would 
destroy the system may be aptly compared to passengers in a 
wooden ship who, on finding the weather cold and the supply 
of fuel insufficient for cooking, are bent upon cutting up the 
ship for fuel in mid-ocean in order to warm themselves by the 
fire. 

50. "We have not yet considered some of the most far-reach- 
ing and yet elementary difficulties in the way of practical so- 
cialism. One difficulty is that no matter how much society 
might want to benefit an individual, it could not do it, from the 



Y. 50.] OF SOCIALISTIC IDEAS. 525 

mere fact of not knowing what the individual wants. Every 
man has his own tastes and whims, which may change from 
day to day, .and which society cannot possibly provide for. It 
is essential to his happiness that he should be allowed to gratify 
such transient wants in the best way he can. It would be vexa- 
tious to have any one but himself decide whether he should take a 
railway journey when he felt that he needed a change ; whether 
he should have coffee or milk for breakfast ; whether he should 
wears his old clothes or be supplied with a new suit. Society 
lets him look out for himself in all such matters, not because it 
is selfish and does not care for his good, but because it really 
cannot help him. He must look out for himself, not because 
other people are indifferent to his welfare, but because they 
cannot promote it as well as he can himself. 

A little consideration will show us that no system of social- 
ism is possible without such an abridgment of individual lib- 
erty as no class of men would for a moment tolerate. If society 
is to guarantee an individual a living, it is quite certain that it 
must prescribe some conditions. To say that every man shall 
be entitled to a living, and yet retain the right to seek work 
where he pleases and to prescribe his own condition of labor, 
would be little short of an absurdity. "What society now does 
is to offer him the best living it can, on the best conditions he 
can command, leaving him free to accept or decline them. Bet- 
ter than this it cannot do. When society prescribed the con- 
ditions to which he must submit, a rebellion would begin. 



526 APPLICATIONS OF ECONOMIC SCIENCE. [V. 52. 



CHAPTER VII. 

OF CHARITABLE EFFORT. 

51. As men advance in civilization the amelioration of the 
condition of their fellows must become a subject of increasing 
interest to them. It is not the function of political economy 
to decide what men ought or ought not to do to promote this 
end. But it is a legitimate function of the science to point out 
the effect upon the welfare of the race of any and every char- 
itable effort into which men may enter. 

We begin with some general remarks upon the impulses of 
our nature. It is a well-known fact that those appetites which* 
are essential to the continued existence of mankind are liable 
to become destructive of his well-being when not controlled by 
reason. Hence in all civilized communities laws are enacted 
having for their object the enforcement of certain restraints upon 
the appetites. The question may now arise whether it is not 
possible that those benevolent impulses of our nature which 
move us to relieve distress and suffering may lead to real injury 
when not guided by reason ; whether, in fact, these impulses 
may not need to be restrained as well as the appetites. That 
such a case is at least possible will be evident when we reflect on 
the complexity of the social organism, on the numerous remote 
effects which the combined charities of the community may 
have in the course of generations, and on how little those who 
give alms consider these effects. It is impossible to maintain 
any general proposition on this subject which shall cover more 
than a limited range. "We must therefore reach a conclusion by 
considering different cases in detail. 

52. Let us first take up the familiar case of a beggar. A 
gentleman is implored for relief by a repulsive piece of human- 



V. 52.] OF CHARITABLE EFFORT. 527 

ity, enshrouded in rags and covered with dirt. Moved by pity, 
he gives him a dime and passes on. "What is the economical 
nature of this transaction ? "We reply that the transaction is one 
of supply and demand, belonging to the same class as the sup- 
ply of and demand for personal services. The combined will- 
ingness and ability of a number of persons in the community 
to give dimes to beggars constitutes a demand for beggary, just 
as much as if an advertisement, " Beggars wanted, liberal alms 
guaranteed," were conspicuously inserted in the columns of a 
newspaper. If there is any difficulty in seeing the truth of this 
statement, it should disappear when the reader reflects that 
nothing is necessary to constitute an economic demand except 
readiness to make payments on certain conditions. Among a 
crowd of children fond of music, an ability and a willingness 
to give pennies to organ-grinders constitute a demand for their 
services. This is evident. Though not so evident, it is equally 
true that an ability and a willingness on the part of people of 
delicate musical ears to give organ-grinders pennies for "mov- 
ing on" are equally a demand for their services, in spite of the 
fact that the service is the very thing they are paying to get 
rid of. The fact that the benevolent gentleman may wish that 
there were no beggars, and may be very sorry to see them, 
does not change the economic effect of his readiness to give 
them money. From an economic point of view the gentleman 
pays the beggar for being poor, miserable, idle, dirty, and worth- 
less. 

Such being the case, the supply of this service arises accord- 
ing to the same economic laws that the supply of any other 
service arises. As in every community where there is a de- 
mand for bricklayers a certain portion of the young will be- 
come bricklayers, and will try to lay bricks in such a way as to 
gain the highest wages, so in a community where there is a de- 
mand for beggars a certain number are sure to become beggars, 
and to study the professional accomplishments which will be 
most likely to draw money from the pockets of the benevolent. 
Hence, in the case supposed, mendicity will exist according to 



528 APPLICATIONS OF ECONOMIC SCIENCE. [V. 54. 

the same laws that govern the existence of other trades and 
occupations. 

53. It is often said that imbecility and mendicity are a 
growth of civilization, being unknown in primitive communi- 
ties. Hence men look upon them as they look upon the dis- 
eases of civilization, namely, as something inseparably associated 
with progress. But a very little consideration will show that 
there is no such necessary connection. Why are there no 
beggars in comparatively poor and simple communities? "We 
answer, for the same reason that there are no great actors, 
philosophers, or mathematicians in such communities. It is 
because the community cannot afford such luxuries. Where it 
is perfectly certain that no one can get anything in alms by any 
method of begging, mendicity can never arise. If, as may 
sometimes be the case, a child grows up too imbecile to make 
a living or do any work, his parents, friends, relatives, or ac- 
quaintances take charge of him as best they can, and are care- 
ful that he is not allowed to wander away and starve. Men- 
dicity can gain a foothold only when the community gets so 
wealthy and benevolent as to present an economic demand for 
beggars and paupers. 

54. A natural reply to the above considerations will be 
that they presuppose the mendicant to voluntarily adopt the 
profession of being miserable, and that, if it can be shown that 
this miserable condition arose without any overt act on his 
part, the law of supply and demand will not cover the case. 

Cases in which this answer would be correct are not incon- 
ceivable. The extreme difficulty of deciding whether the 
misery of any special mendicant is or is not intentional might 
be urged on either side ; but in a scientific discussion we are 
concerned with the principles of the case, rather than the 
special facts. To show what view we are to take of the possi- 
ble antithesis between voluntary and involuntary misery, let us 
consider another case. 



V. 54.] OF CHARITABLE EFFORT. 529 

Here is a little girl, born of poor and rather demoralized 
parents, who is being reared without any definite object in life. 
From early childhood she becomes aware that sums of money 
which seem to her fabulous in amount are raised by rich people 
for the benefit of the poor. If she lives in Europe, she is ac- 
customed to seeing boxes in churches plainly marked " For the 
poor," and she finds out what it means before she can read. 
On getting a little older she becomes conscious that she has no 
chance to get any share of this money except by being even 
poorer than her parents. If she learns to cook for wealthier 
people, to do housework, to sew, to nurse ; and if she uses the 
knowledge thus acquired in such a way as not to be a burden 
upon others, then she will have no right to any of this money. 
To get her share of it, she must remain poor, miserable, and 
worthless. To see what effect this may have upon her educa- 
tion and aspirations, let us look at human nature from another 
point of view. 

We may say that, in a certain sense, men are by nature poor, 
miserable, and worthless. That is to say, if a child grows into 
a man without ever being taught or required to exercise his 
faculties, he will grow into this kind of a being. To make a 
decent living, even of the lowest sort, he must take pains, prac- 
tise self-denial, seek for acquaintances, and make for himself a 
good character among his fellow-men. It is therefore not nee 
essary, in order that the demand for objects of charity should 
be supplied, that any person should deliberately make up his 
mind to be a beggar. To become such all he needs to do is to 
do nothing. He can then with a greater or less approximation 
to truth say, " I have never tried to become a burden on soci- 
ety, and yet I can get no work ; I have nothing to do ; I am 
nearly starved ; I shall soon be naked ; I have no house in 
which to lay my head ; I cannot get money for the barest ne- 
cessities of existence." 

The lesson is this : Although what the man says may be true, 
yet, if there had been no charity, he and his parents would 
34 



530 APPLICATIONS OF ECONOMIC SCIENCE. [V. 55. 

have taken a different view of life, and he would have had a 
different training and a different history. 

55. The question may now be asked, Does it follow from 
all this that no effort to benefit our fellow-man by giving him 
of our own subsistence can be otherwise than vain or injuri- 
ous ? Are we to see thousands of our fellow-beings suffering 
the evils of poverty without making an effort to relieve them ? 
Are we to see them in wretchedness and misery without an 
effort to alleviate their condition ? Is a certain fraction of our 
race doomed to continue the lowest form of existence, do what 
we may ? 

We reply that the questions are not necessarily to be answered 
in the affirmative on account of anything we have said. What 
common-sense unites with science in saying is this : In order to 
alleviate the race we must intelligently adapt our means to our 
ends, and by merely following the blind impulses of our senti- 
ments we do not secure such adaptation. The real difficulty is 
that charitable effort, as we see it every day practised, is not 
directed intelligently to the best ends. The ends to which it is 
intelligently directed are comparatively unimportant ones. To 
show this, let us see what should be the benevolent purposes of 
a reasonable and philanthropic being and comj>are them with 
the ordinary purposes of charitable associations. 

Let us suppose that there are in this country one million peo- 
ple in a state of such destitution that they should receive the 
help of the charitable. Supposing the state of society to re- 
main the same generation after generation, there will continue 
to be a constant portion, say two per cent of the population, in 
this deplorable condition. This brings to our minds three 
classes of people who may need our help. We have, firstly, 
the few score or hundreds whom we, or the organizations with 
whom we are connected, can find in our own city. Secondly, 
we have the remaining portion of the million whom we do not 
see, and whom we must leave others to find. Thirdly, we have 



V. 55.] OF CHARITABLE EFFORT. 531 

the possible future millions who are to live in this country in 
future generations. 

Corresponding to these three classes we have as many differ- 
ent purposes which charitable effort may have in view. The 
ordinary charitable society is devoted principally to the first 
class, namely, those poor whom we can find within their own 
sphere of operations. As a general rule their efforts do not 
make any change in the character of the unfortunate people 
with whom they deal, being mainly directed to the relief of 
their immediate wants. Of course the society would like very 
much to elevate them in their characters and constitutions, and 
many such associations have this in view. But the chances are 
that such efforts do not generally lead to any well-marked bene- 
ficial result. 

Another purpose we might have in view is the relief and 
the elevation not only of the few poor we can find, but of the 
whole million whom we suppose to live in the country. Finally, 
a yet wider and higher motive is that of seeing that the pros- 
pective poor and miserable of future generations are diminished 
in numbers as much as possible. 

We thus see that charity may have very different objects in 
view ; and it is perhaps not quite just to say that charitable 
associations do not intelligently adapt means to ends, for, as 
a matter of fact, it must be considered that if their end is 
merely to relieve those particular persons to whose ameliora- 
tion their efforts are directed, then that end is certainly at- 
tained by them. There can be no doubt that if we give a 
supply of food and clothing to a half-starved family, the wants 
of that family will be relieved so long as the supply holds out. 
The real question is whether this kind of relief should be the 
main object of our supposed reasonable and philanthropic being 
who desires to do the greatest good by his efforts. 

A very little consideration will show us that it should not. 
To a reasonable being the interests of the mass of poor whom 
he cannot reach should be as dear as the interests of the few 
whom he can reach. The object of not adding to the number 



532 APPLICATIONS OF ECONOMIC SCIENCE. [V. 55. 

of the poor and miserable should be kept in view, as well as 
that of aiding the poor and miserable who now exist. The 
diminution of the number of such beings in future generations 
should be kept in sight as well as the diminution of those at 
the present time. 

The first answer to this will be that even if we grant it, yet 
the great mass are people whom we can neither see nor help. 
Still less can we do anything for future generations ; therefore 
we will do our best work by attending to those who are within 
our reach. "We must let the future bear its own burdens. 

Here the philanthropic philosopher must join issue with the 
charitable man. The way we deal with the poor and miserable 
we see around us has a most important effect upon the poor 
and miserable we do not see. The next generation will be 
brought into the world by this generation, and it depends en- 
tirely upon the acts of this generation how many poor and 
miserable there shall be in the next. The law that like brings 
forth like is as true with the human race as with animals and 
plants. The greater the number of the degraded classes who 
are allowed to produce offspring which are allowed to grow to 
maturity, the more rapidly will these classes increase. "What 
effect we wish our acts to have does not come into the ques- 
tion in considering the consequences of those acts. What we 
are concerned with is the natural consequences of our acts and 
not the motives which prompt them. "We cannot evade the 
conclusion that the inevitable result of our current forms of 
charity is to enable the poor, miserable, and worthless elements 
of the community to bring forth children, to enable those 
children to escape the perils of infancy and grow to manhood, 
and to deprive them of the strongest incentive to become use- 
ful members of society, namely, the prospect that they will 
starve to death unless they learn to make a living. This re- 
sult is what the reasonable philanthropist must deplore. 

The defect in. the current reasoning of the charitable is sim- 
ply this : They consider that the effects of their charity termi- 
nate with the relief of their beneficiaries. Hence when they 



V. 55.] OF CHARITABLE EFFORT. 533 

find that an applicant is really worthy, they consider their case 
fully made out. What they do not consider is the moral effect 
of their work upon the demoralized classes at large, and espec- 
ially upon the training of their growing children. 

The question now arises whether there is any way of modi- 
fying these effects. Must all charitable effort be directed sole- 
ly towards enabling the degraded classes to live and propagate 
without elevating them ? Can they not be elevated by such 
action? The answer to these questions should come from the 
socialist rather than the economist, and so does not properly 
belong to the present work. It may, however, be remarked 
that all classes of humanity do, to a certain extent, admit of 
elevation, and that they can, generation by generation, be slow- 
ly elevated if we properly adapt the means to the ends. The 
great end we should have in view is that of enabling the indi- 
vidual to earn a living by his own exertions. So far as our 
charitable effort is directed towards that end and no other, so 
far may its effect be beneficial. Society is greatly in want of 
laborers of every order who can be relied upon. If the chil- 
dren of the degraded classes could be taken in infancy, before 
their bad habits have had time to form, and trained to earn a 
livelihood, a certain proportion of them would be redeemed. 
If those who could not be so trained were allowed to starve, 
the number to grow up a burden on society would be dimin- 
ished. The greatest difficulty in the way of such a policy is to 
organize charitable effort in such a way that it shall be intelli- 
gently directed to this end. The natural tendency of such 
effort is the very opposite of that here pointed out. What we 
really ought to do is to train, persuade, or compel every person 
to earn his living under penalty of starvation. The funda- 
mental idea of current charity is the wholly incompatible one 
of enabling the favored few who chance to excite our sym- 
pathies to get a living without earning it. Just so far as we 
can free ourselves from this benevolent impulse and turn our 
efforts in a more rational direction, so far may we hope that 
charitable effort may yet be beneficial to the race. 



534 APPLICATIONS OF ECONOMIC SCIENCE. [V. 57. 

56. We have seen in preceding chapters of this work that 
every man who saves up and invests his money does really em- 
ploy it in such a way as to benefit all laborers able to earn a 
living. He does this by increasing the supply and lowering 
the price of the necessaries of life. Of course he does not help 
those who are unable to labor, because one who has no income 
of his own can purchase nothing, no matter how cheap it may 
be. We have also seen that the profits on an investment will 
be greater the greater the advantage which it insures to the 
community. If a capitalist's investment is a losing one, it 
shows that the labor he has directed by it has not been em- 
ployed in the most economical manner to supply the wants of 
society at large. Without denying the possibility that intelli- 
gent philanthropic effort may in the future do much for ele- 
vating the most degraded of the race, we may at least lay down 
this proposition : It has not yet been clearly shown that the 
possessor of a fund can benefit the race by it in any more 
effective way than by investing it in the best paying form of 
capital. Better methods will no doubt be found in the future, 
for the reason that this application of capital takes no account 
of the training of children, and it is to this training that phil- 
anthropic efforts should be directed. 

57. Concluding Considerations. The study of political 
economy has two objects. One is the pleasure which every 
well-constituted man feels in understanding the processes which 
are going on in the world. This pleasure is quite independent 
of any relation of these processes to the wants of life. The 
other object is to see how the interests of mankind may be 
promoted by public action. 

It is instructive to seek out a classification of the interests 
which actuate men in promoting the good of themselves or 
others. Our present stand-point leads us to consider three 
motives to human action : 

The love of self ; 



V. 57.] OF CHARITABLE EFFORT. 535 

The love of a limited class having common interests and 
feelings with one's self ; 

The love of mankind at large. 
Let ns consider these motives in order. 
The love of self, or egoism, as it has recently been called in 
philosophy, or selfishness, as its abnprmal development is famil- 
iarly termed, is not so great an evil as is commonly supposed. 
It would indeed be a most destructive agent if it were absolute; 
that is, if men in general were so selfish as to care absolutely 
nothing for the happiness of their fellows. But, as a matter of 
fact, moral training and the habit of obedience to law have so 
modified the inherent selfishness of the individual as to render 
it comparatively harmless. One reason for this harmlessness is 
that, as a general rule, every man can promote his own inter- 
ests a great deal more effectively than he can promote any one 
else's, or than any one else can promote his. Another is that 
the selfish man can get little help from his fellow^men. But 
the most cogent reason of all is that men cannot promote their 
own economic interests except through promoting those of 
their fellow-men. 

The second form of love, that for the class to which we 
belong, is, at present, the most dangerous one to which society 
is exposed. How this is we shall show by comparing it with 
the third form. 

Love for humanity at large has before it a wide field for its- 
beneficial exercise, if it can only be spurred to action and 
directed into appropriate channels. But there are great diffi- 
culties in the way of its most effective operation. It is almost 
a hopeless task for any individual, acting by himself, to do very 
much for the benefit of society at large, unless he is possessed 
of power or wealth. Legislation has done little, because legis- 
latures in general have never had the problem presented to 
them, or made it a subject of special study. Their views 
generally represent those of the community from which they 
come, and the interests which they seek to promote are apt to 
be temporary in their character, and only such as strike the 



536 APPLICATIONS OF ECONOMIC SCIENCE. [V. 57. 

public at first sight. We may make this clearer by some illus- 
trations as showing the general field of possible action which 
lies before us. 

In thirty or forty years nearly all the people now on the 
active stage of life in this country will have passed from that 
stage, and a new generation will have taken their places. To 
one loving mankind at large the happiness of that coming 
generation should be the first object. Now, although at first 
sight it might seem almost hopeless to attempt doing anything 
for this coming generation, yet by looking more closely we find 
that its happiness depends almost entirely upon our own actions. 
To promote its happiness we should bequeath to it physical 
and moral health, a thorough training in correct principles of 
action, and such laws and institutions as shall best allow it to 
promote its welfare. "We should avoid allowing it to be en- 
cumbered by criminals. Love of mankind at large should 
prompt us to take such measures as shall discourage or prevent 
the bringing forth of children by the pauper and criminal 
classes. No measure of repression would be too severe in the 
attainment of the latter object. The consideration due to a 
degraded man of any class is as nothing compared with 
that due to the society of the future. Many a good man has 
gone to his grave through the failure of society to hang one 
criminal. No higher or purer source of human happiness 
exists than the tender sentiments of man towards man. But 
these very sentiments are a source of enduring injury in the 
repugnance which they generate to a really effective system of 
dealing with the dangerous class in our population. 

After promoting the birth of good stock, the next step would 
be its proper education. Here only careful experiment can 
show what society is able to do. The casual remarks which the 
budding child hears dropped from its parents at table, and 
.•from which he forms an idea of the spirit which animates men, 
is a more powerful instrument of education, moral or immoral, 
than any other. This would suggest the foundation of institu- 
tions for the correction of children of tender use who are in 



V. 57.] OF CHARITABLE EFFORT. 537 

danger of becoming criminals. But it is an open question 
whether such institutions are or can be made to succeed. The 
danger which besets most charitable institutions devoted to the 
rearing of children is that of being conducted from a senti- 
mental rather than a scientific point of view. 

Let us now return to the second form of selfishness which we 
have described, and which, as just remarked, is in the present 
state of society, and especially in the United States, a most 
dangerous one. It is dangerous on account of being vastly 
more powerful and less repulsive than individual selfishness, 
while much more injurious to society at large. When we 
analyze the calls for legislation made upon Congress and the 
State legislatures, the economic and social theories in the news- 
papers, and the various factions and parties which contend for 
influence in political affairs, we find that nearly all have the 
interests of companies, corporations, or other special classes of 
men in view, and that it is sought to promote these interests at 
the expense of those of the public. 

The most common example of this motive is seen in the 
trades-unions and labor organizations which exist in nearly 
every civilized country. The individual bricklayer would be 
powerless in a war with society, but his feeling of sympathy 
with all his fellow-bricklayers who are within reach leads to 
a union with them, which comprises a general understanding 
that each individual shall subordinate himself to the union at 
large for the general benefit of the class of bricklayers. This 
feeling extends in a diminished degree to similar unions of 
other trades in the same community, as well as to the unions 
of other communities. Thus we have a sort of network of 
sympathy, strongest in binding the individual to those of the 
same trade who immediately surround him, but yet including 
within its range all the unions of the land. At first sight 
there is something which looks praiseworthy in this devotion 
of man to man, especially when we see, as sometimes hap- 
pens, a number of individuals voluntarily suffering extreme 
privation, and perhaps giving up opportunities for profitable 



538 APPLICATIONS OF ECONOMIC SCIENCE. [V. 57. 

employment, in obedience to a supposed interest of their class. 
Now, what is wanted is that this spirit of sympathy should in- 
clude not merely the limited class which it does, but the whole 
community. Failing in this, the philanthropist would like to 
see it confined to such a field as would benefit the community. 
As things now stand, the organizations are as purely selfish as 
the most selfish individual, and are at the same time vastly 
more powerful, and therefore more difficult to control. 

We have presented these considerations in order to show 
the student of political economy what a field there is for the 
application of what he has learned, if he desires to take an 
active part in the improvement of society. 



ADDENDUM. 



A SUMMARY OF THE LEADING PRINCIPLES OP ECONOMICS 
AS SET FORTH IN THE PRESENT WORK.* 

The economist should understand : 

That there is a general science of economics, founded on 
those characteristics of human nature and on those relations 
of man to his environment which are common to all civilized 
people ; 

That the principles of this general science have to be 
specialized and modified to suit the circumstances of each peo- 
ple to whom they are applied ; 

That the main object of economic science is to enable us to 
foresee the effects of economic causes (I. 24) ; 

That all our conclusions rest upon the hypothesis that men 
intelligently adapt means to ends, and seek their own interests 
according to the best of their knowledge (I. 3, 17, 18) ; 

That there are no universal theories in economics to be 
applied without regard to time and circumstances, and that no 
formula can be given which will save the statesman the labor 
of working out each case on its own merits ; 

But that economics furnishes the statesman with principles 
most necessary for working out results ; 

That capital is the result of abstinence from present gratifi- 
cation for the sake of future good, and, in order to be 



* This summary of economic principles is given in order to facilitate 
their critical examination by the reader. They will also assist the student 
in deciding whether his grasp of the subject is satisfactory. 



540 SUMMARY OF LEADING PRINCIPLES. 

effective, must be so applied as to increase the ultimate product 
of a fixed amount of labor (II. 29, 30) ; 

That stocks, bonds, and every other form of interest-yield- 
ing investments are rights of ownership in material exchange- 
able capital (II. 31) ; 

That the work of the organizer of labor is as necessary to 
production as that of the laborer himself (II. 40) ; 

That labor can slowly change its occupation without detri- 
ment, and can thus adapt itself, within certain limits, to vary- 
ing demands (II. 49, 50 ; TV. 38) ; 

That all men performing economic functions of any kind 
are engaged in labor designed to promote the good of their 
fellow-men (I. 1, II. 53) ; 

That the greater and the better the production of the 
necessaries of life, the more perfectly will the wants of the 
community at large be supplied (II. 54, 56) ; 

That bank credits constitute an integral part of the volume 
of the currency, and should be included with specie and bank- 
notes in estimating that volume (II. 96-99) ; 

That there is no such thing as an absolutely invariable 
measure of value, and that the best approximation to an abso- 
lute standard is found by making labor itself the standard as 
nearly as possible (III. 5-11) ; 

That the quantity of goods whicli can be sold in any market 
under fixed conditions depends upon the price at which they 
are offered, diminishing with every increase of price, and vice 
versa (III. 14) ; 

That the foregoing proposition is true only for each state of 
the market separately, and that the quantity of goods which 
can be sold at a fixed price will vary from time to time with 
the public needs (III. 16) ; 

That all the requisites of production are not equally at the 
command of everybody (III. 21-28) ; 

That rent of land arises only because the products of the 
soil command a higher price than they would if they could 
be produced in unlimited quantities (III. 33) ; 



SUMMARY OF LEADING PRINCIPLES. 541 

That the net cost of production of many commodities de- 
pends greatly upon the natural facilities which the producer 
can command, and continually diminishes with improvements 
(III. 45-47) ; 

That the values of the total imports and exports to and from 
any one country necessarily balance each other in the long-run 
(III. 55-61) ; 

In consequence, that any action which diminishes imports 
must ultimately diminish exports in nearly the same degree 
(III. 70, 71) ; 

That the rate of interest is regulated by the supply and 
demand of loanable funds (III. 72-75) ; 

That every legal person, in the long-run and as a general 
rule, pays out as much money as he receives. Hence any 
increase in his receipts will be followed by a corresponding 
increase in his payments (IY. 4) ; 

That the economic effect of an increased flow of money 
from any person cannot be completely determined until we 
find what laborers the increase reaches (Bk. IY., Chap. YI.) ; 

That there is no definite volume of currency necessary to 
the transaction of the business of a community, but only a 
definite relation between the volume of currency and the scale 
of prices (Y. 30) ; 

In consequence, that a scarcity in the monetary flow can be 
remedied by a fall in prices as well as by an increase in that 
flow ; but that this particular remedy is incomplete and un- 
satisfactory, because all prices cannot thus adapt themselves 
(IY. 40) ; 

That an increase in the volume or flow of the currency does 
not permanently help business, because it leads to a rise of 
prices, and therefore to a greater necessity for money ; 

In consequence, that we cannot increase the absolute value 
of the total volume of currency by additions to that volume 
(IY. 19) ; 

That no increase of wages benefits the laborer if he has to 
pay an increased price for the necessaries of life, as he always 



542 SUMMARY OF LEADING PRINCIPLES. 

will unless his wages are increased by increasing the effective- 
ness of his labor ; 

That as a general rule a person can gain income only by 
assisting his fellow-men to an amount equal to his income 
(IV. 29) ; 

That whenever the price of a commodity rises, some or all 
persons engaged in supplying that commodity are gaining a 
corresponding increase of income (IY. 30) ; 

That no person can increase the demand for labor by ex- 
pending his money in one way rather than in another, but 
that, in whatever way he spends it, he is directly or indirectly 
creating a demand equal to his expenditure (Bk. IY., Chap. 
VI.) ; 

That the demand thus created is for the particular labor 
necessary to produce the commodities which he has demanded, 
and that, in consequence, he directs labor by directing his 
expenditure ; 

That any change in the direction of labor produced by 
change of expenditure can be made by a corresponding change 
in the occupations of men (II. 49) ; 

That by no device of government or society can everybody 
be satisfactorily employed all the time ; 

That demand for labor involves a relation between two 
terms — the laborer's estimate of the value of his services, and 
the wages which others can afford to pay him (IY. 39) ; 

That the proportion of the unemployed will in the long-run 
be nearly the same, whatever financial policy we adopt, and 
however men spend their money ; 

That any cause which prevents the rate of wages from 
adapting itself to the varying demand for labor is injurious 
both to the laborer and to society ; 

That no labor-saving processes can diminish the sum total 
of the demand for labor, because whatever money is thus 
saved to any person goes to demand labor in some other direc- 
tion (IY. 41); 
*■ That the capitalist can gain interest on his investments only 



SUMMARY OF LEADING PRINCIPLES. 543 

by helping his fellow-men who have not accumulated capital 
(Bk. IV., Chap. IX.) ; 

Consequently that the more miserly he is in his habits, and 
the more careful he is in his investments, and the greater the 
excess of his capital above that required by his personal 
needs, the greater the good he does to his fellow-men ; 

That a man takes from the common stock of goods only 
what he actually expends in his own consumption (Bk. II., 
Chap. IX.) ; 

That the sole object of wealth is the sustenance and enjoy- 
ment of individual men ; 

That the benefit of every industrial establishment is 
measured by the product it turns out, and not by the em- 
ployment which it gives to labor or capital ; that, on the con- 
trary, the labor and capital which it absorbs are to be placed 
on the debit side of its account with society (Bk. IV., Chap. 
XIII., and V. 13) ; 

That the motives which animate men in the pursuit of 
wealth are in the highest degree beneficent, and have led to 
a system which insures to every man fit to live the maximum 
of enjoyment from his labor, if he will only adapt himself to 
the system (Bk. V., Chap. VI.). 



INDEX. 



PAGE 

Abstinence the source of capital 

89, 397 
Agriculture, relative diminution 

of 141 

Appropriation of natural wealth 78 
Atkinson, production of U. S. . 469 
Averages, law of 28 

Bank of England 177, 510 

Bank-notes 165 

Relation to laissez-faire 454 

Banks 157 

Deposits and cheques 159 

Circulation 161 

Discount functions 162 

Statements of balance 162, 164 

Runs on 168 

Unsound, in U. S 171 

National, of U. S 173 

Barter 58 

Bastiat, the labor fallacy 428 

His parody of protection 472 

Beggars, supply of 527 

Bimetallism 152, 154, 494 

Argument for 495 

Bounty, French, on sugar 474 

Cairnes, non-competing groups. 117 
Capital, definition and nature. 55, 82 

Classification 84 

Functions of 88, 396, 405 

Property in 91 

Transformation of 121 

Reproduction of 87 

Capitalist, his functions 397 

Carey, II. C, cited 41 

Cause and effect 18, 31 

Cernuscbi on bimetallism 495 

Charity, effects of 526 

Cheques on banks 159 

35 



PAGE 

Cheques, relation to currency. . 191 
Circulation, the monetary. .316, 372 

The industrial 326 

Circulation, equation of 328 

Laws of 338 

Cities, growth of 141 

Clearing-house 179 

Coinage of money 149 

Int. S 153,418 

Present uncertainty of 155 

Subsidiary 155 

Combinations to keep up price 

270, 518, 537 

Commerce, foreign 278 

Commodities, definition 55 

Demand for 374, 404, 434 

Communistic view of wealth.. 5. 127 
Competition of foreign labor. . 104, 467 

Determining price 248, 517 

Among business men 252 

Among producers 266 

Congress as a regulator of in- 
dustry 456, 458 

Management of 458 

Consumption, definition 59 

Productive and unproductive 59 

Copyright 233 

Cost of production 257 

Graduated 264 

Credit, definition of 52, 157 

Use as money 163, 189 

Currency, volume of. . .155, 187, 320 

Fluctuations in volume 342 

Flow of 316 

Regulation of 501 

Customs duties 296, 459, 477 

Debts, relation to standard of 

value 214 

Effects of payment 385 



546 



INDEX. 



PAGE 

Deduction, example of 17 

Deductive method, nature of. . . 25 
Demand, relation to price 217,220,350 

Equal to supply 222 

Measure of 348, 355 

Directs industry 369 

For goods and labor. 374, 404, 434 

Deposits in bank 159, 161 

Diminishing returns 242 

Division of labor 98 

Dollar, "what it is 153 

Absolute value of 213, 425 

The fiat 507 

Duties on imports 296 

Economics, definition and field 13 
Distinct from sociology and 

morals 10 

Logical method 14, 22 

Efficiency of the laborer 103 

Equilibrium of supply and de- 
mand 266, 271 

Exchange, definition 57 

Friction of : 62, 106 

Mechanism of 145 

Foreign 183, 281 

Graphic representation of . . . . 315 

Fallacies in logical method 33 

In conclusions 419, 472 

Fiat-money 507 

Flow of currency 316, 318 

Fluctuations in supply and de- 
mand 114 

France, volume of currency in . 191 

Free trade, argument for 461 

Between States 476 

Friction of exchange 62, 106 

Gold, supply and demand 498 

Stock of, in U. S. . . . .' 497 

Government, functions of 452 

Greenbacks of U. S 506 

Gresham's law 413 

Hard times 380 

Income of persons 359 

Corporate 361 

Expenditure of 363 

Laws of 365, 368 

Tax upon 489 

Induction, process of 17 

Interest an element of cost 258 

Origin of 88, 302 



PAGE 

Interest, rate of, how determined 

304, 306 

Relation to risk 310 

Why paid 303 

International trade 278 

Iron ship-building in U. S 477 

Irrigating companies, rights of 81 

Jevons's theory of value 202 

Knowledge is a factor in pro- 
duction 27, 72 

Labor, necessity and law of 6 

Definition of 48 

Employment of 412 

Classification of 95 

Organization of 97 

Division of 98 

Relation to capital 405, 408 

Fallacies of 419, 472 

Competition of foreign.. .104, 467 

Laborer, who he is 93 

Distinguished from capitalist 94 
Condition of his prosperity. . 393 
Improvement in condition. 388, 514 

His wages 95 

His efficiency 103 

Foreign competitors 104, 467 

Labor-saving improvements.. 99, 388 

Laissez-faire 443 

Land, rent of 241 

Ownership of 79 

Fertility of 244 

Laughlin, demand for labor.... 434 
Laws of nature, definition of .16, 18 

Legal tender, money as 151 

Loans by government 482 

Logical processes 14 

Luxuries, enjoyment of 395 

Machinery, functions of 98 

Effect on laborers 388 

McLeod, his view of property. . 56 

Malthusian theory 107, 112 

Man, a reasonable being 23 

Managers of railways 255 

Of business 254 

Manufacturing capital 409 

Market, definition of 217 

Foreign 475 

Materials, raw, of production.77, 233 

Mercantile system 286 

Method of economics 9, 22, 31 

Mill, demand for labor 434 



INDEX. 



547 



PAGE 

Monetary ratio 153, 499 

Money, necessity of 58, 145 

Paper ". 415, 503, 506 

Metallic 148 

Requirements of 147 

Coinage of 149, 153 

Credit as 163,189 

Purchasing power 213, 345 

Value of 226, 346 

Circulation of 318 

What kinds preferred 413 

Fallacies 420 

Monometallism 152, 494 

Argument for 496 

Monopolies, nature of 230, 238 

Classes of 233 

Temporary 237 

Effect of 239 

As element of cost 259 

Mortgages 66 

Non-competing groups. 117, 377, 392 

Occupations, gains in different 253 

Organism, the social 5, 7 

Organization of labor 97 

Organizers, their functions. 101, 515 

Panics, commercial 384 

Paper money, irredeemable, law 

of value 508 

Depreciation of 226, 414, 507 

Displaces metallic money. 414, 507 

Patent rights 233 

Political economy, its field 10 

Its logical method 22 

Its fundamental hypotheses. . 23 

Its leading points 9, 31 

Its nomenclature 47 

Its processes 123, 128 

Population, law of increase. . . . 108 

Malthusian theory 107, 112 

Changes in occupation 139 

Requires capital 400 

Poverty, conditions of 135 

Influence of charity on 527 

Prices, scale of 207 

Absolute 209 

Variations of, 1876-84 211 

Relation to demand.. 217, 220, 350 

Of breadstuff s 246 

Effect of competition of 250 

How determined 263, 273 

Combinations to regulate 270 



PAGE 

Prices, international , 278 

Relation to flow of currency.. 386 

Production, definition of 57, 70 

Requisites of 70 

Improvements in 137 

Cost of 257, 264 

Determined by demand 372 

In different countries 280 

Effect of taxes on 290 

Total, ofU. S 469 

Profits 257, 262 

Progress, marks of 141 

Property, its relation to wealth 

49, 53, 56 

Mr. McLeod's view of 56 

Prosperity, conditions of. . .134, 358 

Protective tariff 459 

Arguments for. .461, 463, 467, 473 

Railways, regulation of 454 

Ratio, monetary 152, 499 

Rent of land 241 

Relation to price 245 

Element of cost 257 

Reserve of banks 163 

Of Bank of England 177 

Of national banks 175 

Retail prices 248 

Revenue of government 479 

Risk,relation to rate of interest, 310 

Saving, effect on labor 388, 397 

Sensitive commodities 218 

Shipbuilding in America 477 

Silver, supply and demand 498 

Price of 154 

Coinage of, in U. S 418 

Skill in production 72, 233, 261 

Smith, Adam, on taxation 488 

Socialism 512 

Difficulties of 520 

Specie payments, suspension of 172 

Speculative transactions 224 

Spencer, Herbert, progress of 

society 141 

Standard of value 208 

Steam-transportation, effect of.. 100 

Strikes, effect of 387, 521 

Supply, definition of 217 

Supply and demand determine 

price 217 

Of monopolized products.239, 271 

International 278 

Equal to demand 222 



548 



INDEX. 



PAGE 

Sustenance, definition of 82 

Taxation 290, 479 

Effect on production 290 

Practical hints on 493 

Effect on foreign trade 293 

Taxes, classification of 484 

Expenditure of 482 

On income 489 

On production 290 

Telegraph companies 455 

Telegrams, price of 276 

Trade, international 278 

Balance of 281, 286, 297 

Effect of taxes on. . ..283, 290, 298 

Advantages of 288 

Transformation of capital 121 

Usury laws 305, 511 

Utility, its relation to value 200 



PAGE 

Value, definition of 62, 199 

Measure of 63, 205, 424 

Jevons, theory of 202 

Relation to human needs. . . . 204 

Tabular standard of 210 

Of money 226 

Volume of the currency 155,187, 320 

Wage-fund 325 

Wages, definition of 95 

Absolute measure of 357 

Element of cost 257 

Effects of hard times on 382 

Effect of protective tariff on.. 467 

Relation to capital 411 

Walker, classification of labor.. 95 

On rent 241 

Wealth, definitions of 48 

Natural 77, 233 

Inequalities in 513 

Wealthy class, functions of. 397, 513 



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CESNOLA'S CYPEUS. Cyprus : its Ancient Cities, Tombs, and Temples. 
A Narrative of Researches and Excavations during Ten Years' Eesidence 
in that Island. By L. P. di Cesnola. With Portrait, Maps, and 400 
Illustrations. 8vo, Cloth, Extra, Uncut Edges and Gilt Tops, $7 50 : 
Half Calf, $10 00. 

VAN-LENNEP'S BIBLE LANDS. Bible Lands: their Modern Customs 
and Manners Illustrative of Scripture. By Henry J. Van-Lennep, D.D. 
350 Engravings and 2 Colored Maps. 8vo, Cloth, $5 00; Sheep, $6 00: 
Half Morocco, $8 00. 

LIVINGSTONE'S ZAMBESI. Narrative of an Expedition to the Zambesi 
and its Tributaries, and of the Discovery of the Lakes Shirwa and 
Nyassa, 1858 to 1864. By David and Charles Livingstone. Illus- 
trated. 8vo, Cloth, $5 00 ; Sheep, $5 50. 

LIVINGSTONE'S LAST JOURNALS. The Last Journals of David Liv- 
ingstone, in Central Africa, from 1885 to his Death. Continued by a 
Narrative of his Last Moments, obtained from his Faithful Servants 
Chuma and Susi. By Horace Waller. With Portrait, Maps, and Il- 
lustrations. 8vo, Cloth, $5 00 ; Sheep, $6 00. Cheap Popular Edition, 
8vo, Cloth, with Map and Illustrations, $2 50. 

BAKER'S ISMALLIA : a Narrative of the Expedition to Central Africa for 
the Suppression of the Slave-trade, organized by Ismail, Khedive of 
Egypt. By Sir Samuel W. Baker. With Maps, Portraits, and Illus- 
trations. 8vo, Cloth, $5 00 ; Half Calf, $7 25. 

TENNYSON'S COMPLETE POETICAL WORKS. The Poetical Works 
of Alfred Tennyson. With numerous Illustrations by Eminent Artists, 
and Three Characteristic Portraits. 8vo, Cloth, $2 00 ; Gilt Edges, $2 50. 

CURTIS'S LIFE OF BUCHANAN. Life of James Buchanan, Fifteenth 
President of the United States. By George Ticknor Curtis. With 
Two Steel-Plate Portraits. 2 vols., 8vo, Cloth, Uncut Edges and Gilt 
Tops, $6 00. 

GENERAL BEAUREGARD'S MILITARY OPERATIONS. The Military 
Operations of General Beauregard in the War Between the States, 1861 
to 1865; including a brief Personal Sketch, and a Narrative of his Serv- 
ices in the War with Mexico, 1846 to 1848. By Alfred Roman, for- 
merly Aide-de-Camp on the Staff of General Beauregard. With Por- 
traits, &c. 2 vols., 8vo, Cloth, $3 50 ; Sheep, $4 50 ; Half Morocco, $5 50 ; 
Full Morocco, $7 50. (Sold only by Subscription.) 

PRIME'S POTTERY AND PORCELAIN. Pottery and Porcelain of all 
Times and Nations. With Tables of Factory and Artists' Marks, for the 
Use of Collectors. By William C. Prime, LL.D. Illustrated. 8vo, 
Cloth, Uncut Edges and Gilt Tops, $7 00 ; Half Calf, $9 25. (In a Box.) 

GIESELER'S ECCLESIASTICAL HISTORY. A Text-Book of Church 
History. By Dr. John C. L. Gieseler. Translated from the Fourth 
Revised German Edition. Revised and Edited bv Rev. Henry B. Smith, 
D.D. Vols. I., II., III., and IV., 8vo, Cloth, $2 25 ; Vol. V., 8vo, Cloth, 
$3 00. Complete Sets, 5 vols., Sheep, $14 50; Half Calf, $23 25. 






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